Low rates on mortgages turn many into `refi' addicts

Nation's Housing

August 25, 2002|By KENNETH HARNEY

A FEW QUESTIONS before the diagnosis: Have you refinanced more than three times in the past four years? More than four times in the last decade?

Do you track mortgage rates - or the 10-year Treasury bond-- more intently than you track your favorite team? Do you aspire to catch every trough in every rate cycle so as never to miss an opportunity to save a little money on your monthly mortgage payment?

Do you know your mortgage broker well?

Did you lock in last week?

If you answered yes to these questions, there is a good chance that you have a rapidly spreading condition being observed and cataloged in hundreds of lenders' and brokers' offices around the country: "refi" addiction.

Douglas Duncan, chief economist for the nation's largest mortgage trade group, the Mortgage Bankers Association of America, says lenders are getting droves of new cases daily. He says he refinanced his own mortgage in October - 6 percent for 15 years - but now feels an overwhelming compulsion to refinance again as soon as possible.

Duncan identifies such behavior as serial refi syndrome.

(In the spirit of full disclosure: Unable to control myself when 30-year rates approached their 40-year low last week, a hair above 6 percent, I, too, locked in. My last refi was in October 1998, when rates hit another cyclical low. So I know this syndrome firsthand.)

Mortgage brokers at the front lines of the refi binge have files bulging with their clients' rapid-refi histories. Some of the records go back to the early 1980s, when rates began their historic slide from more than 16 percent - yes, people actually bought houses with such loans - into the mid-teens. Back then, a really gutsy refi was from a 30-year fixed rate of 14 percent into a new and untested adjustable-rate mortgage at about 11 percent.

Since the late 1990s, the rage has been "zero cost" refinancing, in which you ask the loan officer to roll your settlement costs into the interest rate. If you have a 7.5 percent loan and rates have dropped to 6.75 percent, you sign up for a 7 percent loan - a quarter of a percentage point above the going rate - and pay nothing in closing costs out of pocket.

Yes, you're still paying transaction expenses such as points, appraisal fees, title insurance and the rest. No, the loan is not truly zero cost. You just don't pay anything out of pocket. You pay for it over a period of time in the form of a slightly higher rate. But that rate is half a point lower than the one you were paying before the refi, so do you really care? Probably not, until rates drop again and that irresistible urge comes over you.

Another characteristic of recent rapid refi mania is the huge numbers of homeowners using their mortgages as the centerpiece of their personal financial planning strategies.

Mortgage broker Paul Skeens of Carteret Mortgage Corp. in Fort Washington, Md., says many of his serial refinance customers are highly strategic. In one refinance, the prime objective might be to pull out cash and get rid of higher-cost debts, paying off home equity lines and credit card bills with lower-cost home mortgage debt.

The next time the same clients refi, their strategy might be rate reduction, with no cash out. They move from a 7.5 percent loan to a 6.5 percent loan solely to reduce monthly cash outlays. On their third refi, the purpose might be to throttle down from a 30-year term to a 15-year term as a retirement-planning move.

Serial refis have snares. Henry Savage, president of PMC Mortgage Corp. of Alexandria, Va., points out that some "no-cost" refis make less sense than others because the full settlement charges are loaded into the principal debt on the mortgage, rather than into the rate.

That addition to principal distorts a borrower's equity position. If forced to sell in an unexpectedly weak market a year or two down the road, a homeowner might have more debt - and less net equity - than needed.

Another, lesser-known snare lurks for rapid refi addicts It's called the Internal Revenue Code. Before pulling huge amounts of cash out in your latest refi, put in a call to your accountant or tax adviser. Contrary to what you might think, not all of the interest on your new and larger replacement mortgage might be tax-deductible.

Kenneth R. Harney is a syndicated columnist. His e-mail address is kenharney@ aol.com. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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