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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Tradelite who wrote (4649)	8/24/2002 6:27:09 PM
From: Tradelite	Respond to of 306849

Great column by Ken Harney about serial refinancing....If homeowners are truly using the cash to pay off debt, that's a good thing.....If they're ignorant of what "no cost" refinances mean and what the IRS thinks of the whole thing--that's a bad thing. Second half of the story is the most informative, in my opinion. _________ washingtonpost.com Acute Cases of Refi Fever By Kenneth R. Harney Saturday, August 24, 2002; Page H01 A few questions before the diagnosis: Have you refinanced your mortgage more than three times in the past four years? More than four times in the past 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 catalogued in hundreds of lenders' and mortgage brokers' offices around the country: refi addiction. Douglas Duncan, the chief economist for the nation's largest mortgage trade group, the Mortgage Bankers Association of America, says lenders are seeing droves of new cases daily. Of course, Duncan also admits that he refinanced his own mortgage only last 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 at 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 first-hand.) 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 a historic slide from above 16 percent (yes, people actually bought houses with such loans). Back then a really gutsy refi was from a 30-year fixed rate of 14 percent into a new and untested "adjustable rate" mortgage in the 11 percent range. Since the late 1990s, the rage has been "zero cost" refinancing, deals in which you ask your loan officer to roll your settlement costs into the interest rate. If, for example, you have a 7.5 percent loan and rates have dropped to 6.75 percent, you sign up for a 7 percent loan -- one-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 an extended period in the form of a slightly higher rate. But since that rate is half a percentage point lower than what you were paying before the refi, do you really care? Probably not . . . until rates drop again, and that irresistible urge comes over you again. Another characteristic of recent rapid-refi mania: Huge numbers of homeowners are using their mortgages as the centerpiece of their personal financial planning strategies. Fort Washington mortgage broker Paul Skeens of Carteret Mortgage says many of his serial refinance customers are highly strategic. In one refi the prime objective may 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 refinance, their strategy may be purely 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 objective may be different again: to drop from a 30-year to a 15-year term as a retirement-planning move. Serial refinancings involve some risks, too. Henry Savage, president of PMC Mortgage of Alexandria, points out that some "no-cost" deals make less sense than others because the full settlement charges are loaded into the principal debt on the mortgage, rather than the rate. That addition to principal distorts a borrower's equity position. If forced to sell in an unexpectedly soft market a year or two later, a homeowner might have more debt -- and less equity -- than needed. There's another, lesser-known danger that lurks in the bushes for rapid refi addicts, however. It's called the Internal Revenue Code. Before pulling out huge amounts of cash on your latest refi, put in a call to your accountant or tax adviser. Contrary to what you might think, not all the interest on your new and larger replacement mortgage may be tax-deductible. The bottom line here: If you've got refi addiction, remember, there are much worse things you could have. And if you have an overwhelming compulsion to refinance, just make sure you are refi smart. Kenneth R. Harney's e-mail address is kenharney@aol.com. © 2002 The Washington Post Company