Homeowners have used the favorable interest rates over the last 10 years as a means to refinance first and second mortgages with lower rate first mortgages and also have acquired second mortgages for personal use. In the early nineties, fixed rate mortgages were between 7.5% and 9%. As rates started to drop in the late nineties, homeowners looked at refinancing at more favorable rates. Mortgage rates dropped to rates in the 4% range for fixed mortgages. In addition, the mortgage market offered many different types of adjustable rate mortgages with rates as low as 1.25% for negative amortization. For example, a homeowner with a fixed 7.5% mortgage can use the equity in their home to lower their payments to credit card companies. They can acquire a second fixed rate mortgage at a rate of 5% and will realize significant savings with this acquisition. Now the total payments on the two mortgages, first and second, will total significantly less per month as opposed to their first mortgage and the high credit card debt payments. If the homeowner in the above example decided to reduce their payments by the use of an adjustable rate mortgage, he could have a rate below the fixed rate mortgage but be subject to adjustments up or down based on an index. The index can be based on the prime rate plus or minus 0% to 2%. This type of loan taken in 1995 would have an interest rate of 4.5% in 1995. If this loan was at a prime rate plus 1.25% today that rate would be close to 9%. With a cost of the loan in todays market totaling over $2,000. The traditional home purchased used an 80-20 formula; today homes may be financed and refinanced at 100% or even 125%. The traditional 80-20 formula was 20% of the purchased price paid as the down payment and 80% financed. Properties financed at a rate above 80% of the fair market value of the property will sometimes be required by the lender to acquire PMI. What is PMI? It is a private mortgage insurance, which may be required by the lender when the loan exceeds 80% of the value of the property mortgaged. How can a PMI be canceled or terminated? Mortgage lenders are required by the Homeowners Protection Act of 1998 to automatically cancel the PMI once the homeowner pays down the balance to 78% of the value if the loan is current. If the loan is delinquent, the termination will take place on the date the mortgage is current. Homeowners may request that the PMI insurance be canceled anytime the balance on the loan is less than 80% of the value of the property mortgaged. The major disadvantage of refinancing first and second fixed rate mortgages with adjustable rate mortgages is higher future payment plus additional mortgage insurance. |
