December 3, 1999

New loan removes need to refinance

By TOM KELLY
The Real Estate Advisor

Countrywide Home Loans has released one of the most talked about new loan programs of the year, hoping to capture customers for life with a mortgage that solves the basic need to refinance.

The product, the eEasy Rate Reduction Plan, offers borrowers the security of a fixed-rate loan and the chance to lock in lower rates as they occur.

Costs on the surface are significant, and consumers should always weigh the variety of choices available, including a lump-sum principal reduction or a "no cost" refinance. While refinance fees can often hit 4-5 percent of the outstanding loan balance, Countrywide will charge 2.5 percent fee of the remaining loan amount every time the borrower wants to refinance and lower the rate. The difference in cost is mostly comprised of appraisal, title, credit, recording and other fees.

"As lenders, we get buried with refinances when rates go down," said Gregory A. Lumsden, Countrywide's managing director-loan organization. "This way, we can keep the customer and they can get the lower interest rate. We simply want to keep their business."

Lumsden shares the same experience as other lenders. When rates go down the phone rings and too many busy signals mean lost customers. For example, last January, when 30-year, fixed-rate loans hovered at 6.60 percent for more than two weeks, 1.4 million people requested a refinance, according to the Mortgage Bankers Association. That was nearly twice the number of applicants of the previous Rush to Refinance, which occurred in 1993.

While some "portfolio" lenders offer a one-time rate reduction option with fixed-rate loans, the eEasy Rate Reduction Plan permits homeowners to lower their interest rate as many times as they wish, and as often as once a month. Competition will definitely come from the various "no cost" products offer by most lenders. However, "no cost" means you'll have to pay an interest rate that is as much as 5/8 higher than the going rate.

The hook, and beauty of the new Countrywide product, is that consumers can take advantage of the no-cost option by lowering the rate while retaining the same loan term -- for no cash out of pocket.

Although Countrywide would not say which secondary market agency was involved in the new loan's structure, reportedly Fannie Mae has entered into an exclusive agreement with Countrywide to offer these loans initially.

The features of the new loan include:

• No need to requalify. A phone call, or website visit, will suffice. No new credit report is required, no new loan application.
• Debt management. Borrowers can lower their rates as soon as rates drop.
• Quick implementation. After a request, the new rate takes effect the first day of the following month.
• Term flexibility. Borrowers can lower their monthly rates, and payments, without extending the term of the loan.

Let's say a move-up couple with high-school-aged children buys a large family home. Their mortgage is $200,000 and their interest rate is 8 percent. For some unexplainable reason, interest rates drop to 7 percent tomorrow and, with the new Countrywide option in the back of their minds, they know they can immediately take advantage of the interest-rate drop.

Should they get on the computer, or phone, in the morning and take advantage? The decision is easy -- if they understand the product -- and here's why:

The monthly payment on a 30-year, fixed-rate loan of $200,000 at 8 percent is $1,468 (without property taxes and insurance). That same loan at 7 percent costs $1,331 a month, or a savings of $137 per month. Ordinarily, it would take more than 36 months for the couple to break even on the $5,000 fee (2.5 percent of $200,000) that it would cost them to secure the lower rate.

Countrywide is not betting on consumers plopping down cash. The lender believes that the no-cost option will lure consumers who will reduce the rate to approximately 7 5/8 percent immediately for no cash out of pocket. If customers applied that $5,000 as an "additional principal payment" at the bottom of their monthly mortgage coupon, the couple would cut their 30-year loan term by nearly 31 months.

Now, with those high-school kids out of the house, will the couple still want the large family home? Would that $5,000 be better spent elsewhere -- perhaps in a retirement fund? Although I'm a pay-it-off kind of guy when it comes to the roof over your head, it's best to always consider other possibilities and realistic needs.

If living with the screws too tight is going to cause you to lose sleep, take another avenue. If knowing you are paying off you house faster will enable you to sleep soundly, then "mental equity" is clearly worth more than money. This new plan allows you to reduce the rate without starting all over again with a full-blown refinance.

Sleep on it.

Previous columns:

• Scenes from the NAR expo, 11-25-1999
• A look at the future of housing, 11-19-1999
• Your guide to mortgage insurance, 11-05-1999
• Who needs HUD?, 10-29-1999
• A closer look at inspections, 10-22-1999
• HUD earns its criticism and praise, 10-15-1999
• NAR faces stock option scandal, 10-08-1999
• Taking on a partner in buying a house, 10-01-1999