Mortgages & Refinancing

Mortgages: The unlikely case for fixed-rate loans

WSJ's Mortgages: The unlikely case for fixed-rate loans

Thursday, February 24, 2005
By Ruth Simon, The Wall Street Journal

A surprising shift in interest rates is reshaping the landscape for home buyers and borrowers.

As the Federal Reserve has boosted short-term rates, it has become more expensive to take out adjustable-rate mortgages and home-equity lines of credit. Usually when short-term interest rates go up, long-term interest rates go up as well. But confounding many experts, rates on 10-year Treasurys -- the benchmark for long-term, fixed-rate mortgages -- have been edging downward or moving sideways.

The upshot is that ARMs are getting costlier while fixed-rate mortgages have been getting less expensive. And that means ARMs _ which can offer big savings over long-term fixed-rate mortgages _ are losing some allure. Currently, rates on one-year ARMs average 4.36 percent, just 1.35 percentage points below the 5.71 percent rate on 30-year fixed-rate mortgages.

As recently as last July, one-year ARMs were averaging more than two percentage points below 30-year fixed-rate loans, according to HSH Associates, financial publishers in Pompton Plains, N.J.

Some lenders are starting to see a shift in borrower preferences, as people begin to trade in short-term ARMs for fixed-rate loans or adjustables with longer fixed periods. At Wells Fargo & Co., the proportion of borrowers choosing fixed-rate loans has risen to levels not seen since last March. More borrowers are also opting for adjustables that are fixed for the first 10 years. Countrywide Financial Corp. says refinancing activity has been "exceptionally strong."

If long-term rates edge down much further, some mortgage analysts predict a refinancing boomlet. As many as 65 percent of borrowers could profitably refinance if long-term rates drop to 5.40 percent, says Dale Westhoff, head of mortgage research at Bear Stearns Cos.

.....

Usually long-term rates move up when short-term rates increase. Instead, just the opposite has been occurring. Rates for 30-year fixed-rate mortgages have been closing in on last year's lows of about 5.53 percent, though they rose slight last week.

....

Home-equity lines of credit, while still popular, are also losing some luster because they, too, are tied to rising short-term rates. Lou Barnes, a mortgage broker in Boulder, Colo., says he started getting calls from anxious borrowers just after Christmas. "People who got into a home-equity line 18 months ago with a 3 percent rate are now staring at 5.5 percent," he says. Home-equity lines of credit are typically tied to the prime rate, which has climbed to 5.5 percent from 4 percent in June.
(see wsj for full article)

Home equity used to finance Super Bowl trips

Here's one to file in the really dumb ways to use your home equity line of credit:

Some Eagles fans are willing to bet the house for big game
By MICHAEL RUBINKAM - Associated Press

PHILADELPHIA - Kevin O'Donoghue is going to the Super Bowl. When he gets back, he'll worry about the house he mortgaged to watch his beloved Eagles.

He's not alone. Some Philadelphians are so desperate to get down to Jacksonville for the big game that they're borrowing against their homes to pay for the tickets.

O'Donoghue, who was 11 the last time his team made it to the Super Bowl, promised himself he'd be there if they ever made it again — no matter what it took.

After the Eagles advanced to their first Super Bowl in 24 years, O'Donoghue told his wife, "I don't care if we have to mortgage our house, I'm going."

She replied, "Wait a minute, maybe that's a good idea."

So O'Donoghue sank $4,000 on a Super Bowl package that includes round-trip airfare, a four-night hotel stay and one ticket to Sunday's game. To pay for it, he applied for a home equity line of credit, a way of borrowing money that required him to put up his house as collateral.

"Sometimes the cards are maxed out, and you gotta do what you gotta do," said O'Donoghue, 36, an account executive from Glen Mills.

Mortgage bankers in Philadelphia and southern New Jersey say that Eagles fans have been inquiring about re-financing mortgages, or taking out home equity loans or home equity credit lines, to pay for what O'Donoghue calls "the chance of a lifetime."

Eric Reeber, a mortgage banker in Mount Laurel, N.J., said his office has gotten at least a dozen calls from Eagles fans looking for some quick cash. He said two couples have already been approved and were scheduled to close on their loans. (He said they were too embarrassed to talk publicly about their borrowing.)

"Some people don't care if it costs them $100 more a month," said Reeber, of Northern States Funding Group.

NASD Alerts Firms About Liquefied Home Equity Concerns

Notice Reminds Firms That Using Home Equity for Investments Not Always Suitable

WASHINGTON, Dec. 8 /PRNewswire/ -- Concerned about the increasing number
of investors who are turning home equity into cash to make investments, NASD
today reminded regulated firms of their obligation to perform a careful suitability analysis before recommending such a strategy to an investor.
"Many homeowners have become wealthier -- at least on paper -- because of
escalating home values. And more of them than ever before are tapping into
their increased home equity to purchase securities," said NASD Vice Chairman
Mary L. Schapiro. "But turning equity into cash to make financial investments
isn't an appropriate strategy for many investors. That strategy poses
significant and unique risks, and failure to understand those risks could cost
them their biggest asset -- their home."
NASD spelled out its concerns and its recommendations to regulated firms
in Notice to Members 04-89: Liquefied Home Equity. In March, NASD issued an
Investor Alert on the subject, Betting the Ranch: Risking Your Home to Buy
Securities. In May, NASD issued a related Investor Alert on the risks
associated with pledging securities in lieu of a mortgage down payment, 100%
Mortgages: The Low Down on No Money Down.

The concerns outlined in the Notice to Members issued today include:

* The increasing use of home equity for investments. In addition to its
own observations, NASD cites a Federal Reserve Board study that found
that during the most recent period it reviewed -- 2001 through the
first half of 2002 -- 11 percent of the total funds from mortgage
refinancings were used for stock market and other financial
investments. That's up from less than two percent during the previous
period studied, 1998 through the first half of 1999. The average
amount of cashed-out home equity individuals used for investments also
increased substantially -- from "relatively small amounts" in the
1998-1999 period to more than $24,000 in 2001-2002. The average
amount used for investments was greater than nearly all other
categories, including home improvement.

* An investor may lose his or her home if the return on investments is
not sufficient to cover the new mortgage or line of credit
obligations. Or, if the value of an investment decreases, the
investor may need to sell his or her investments to protect his or her
home and limit further losses.

* Investors may fail to recognize potential conflicts of interest, such
as a broker's interest in generating commissions or fees on
investments from the cash proceeds of a refinancing or home equity
line of credit -- or the firm's interest in generating compensation
for itself or an affiliate for originating and/or servicing the new
mortgage or line of credit.

* Cashing out home equity may undermine the asset diversification
benefit of home.

The Notice to Members issued today recommends that, in addition to the
factors typically considered as part of a suitability analysis, regulated
firms also consider the amount of equity the investor has in his or her home;
the level of equity being liquefied for investments; how the investor will
meet his or her increased mortgage obligations; whether the new mortgage or
home equity loan is at a fixed or variable rate; the investor's risk tolerance
with respect to the funds being invested; the investor's overall debt burden,
and the sustainability of the value of the investor's home.
NASD's Notice to Members also includes "best principles" for disclosing
relevant risks and conflicts, including: the potential loss of one's home; the
fact that unlike other potential lenders, the recommending firm has an
interest in having the proceeds of the loan used for investments that may
generate commissions, mark-ups or fees for the firm; the recommending firm or
its affiliate may earn fees in connection with originating and/or servicing
the loan; the impact of liquefied home equity on the ability to refinance a
home mortgage, and the possibility that a change in home value could result in
negative equity in the home.
The Notice to Members also recommends that firms consider whether to
establish general standards for when a recommendation to invest home equity
proceeds should be prohibited -- for instance, when an investor wishes to use
home equity for particularly risky investments, or wants to withdraw home
equity above a specific threshold.
Investors can obtain more information about, and the disciplinary record
of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck.
NASD makes BrokerCheck available at no charge to the public. In 2003, members
of the public used this service to conduct more than 2.8 million searches for
existing brokers or firms and requested almost 180,000 reports in cases where
disclosable information existed on a broker or firm. Investors can link
directly to BrokerCheck at http://www.nasdbrokercheck.com. Investors can also
access this service by calling 1-800-289-9999.

Use of home equity loans growing during holidays

From bankrate.com comes an article on using Home Equity Line of Credit or Home Equity Loan to pay for holiday expenses, and surprisingly says it is sometimes appropriate:

Home equity lines of credit, or HELOCs, work like credit cards. Instead of getting a lump sum, you start out with a credit line, and you can draw up to the credit line's limit. During the first years of the account, the minimum monthly payment covers only the interest on the balance. The rate is variable and usually is tied to the prime rate.

On both kinds of equity debt, the interest you pay is deductible from your federal income taxes in most cases.

That's the key, Hsieh says. If you decide to take some time to pay off your holiday debt, why not do it with tax-deductible interest?

"Is it irresponsible to dig into equity (to pay for gifts?)" Hsieh asks. "Yes. But if you're going to get into debt and you're disciplined enough to pay it off in a predetermined time, there is an advantage to using a HELOC because the interest is deductible."

Rudy Cavazos, spokesman for Money Management International, a national credit counseling agency based in Houston, agrees that buying things with low-rate home equity debt "beats using that credit card" with higher rates and no tax-deductibility. But he's not sure every consumer understands all the differences between regular credit cards and cards tied to HELOCs, including the biggie: "You're placing your home on the line as security, as collateral, for these funds."

Sure, the HELOC has a lower rate and the interest is tax-deductible. But the regular credit card is unsecured, meaning that the balance is not backed by collateral -- so the debt can be wiped clean in some bankruptcies. Not so with a card tied to a HELOC. If you buy your godson a Christmas gift with your HELOC, you are pledging your house as collateral. You can't walk away from the debt, even in bankruptcy.

This important point might not be stressed at the time of the loan application, and that's why Cavazos recommends that consumers get some kind of loan counseling before they take out home equity loans or get Home Equity Line of Credits.

Home Equity Lines of Credit Stats

ARLINGTON, Va., Nov. 10 /PRNewswire/ -- About half (48%) of home equity lines of credit change when the prime rate changes, while others are adjusted on a monthly basis, according to the Consumer Bankers Association's 2004 Home Equity Loan Study, released today. Most (78%) line of credit rates are based on the prime rate as published in the Wall Street Journal, plus a spread over that index.

The average amount outstanding on lines of credit was $36,427, based on data as of June 30, 2004, virtually unchanged from $36,602 a year earlier. A .25% increase in the prime rate will increase the monthly payment on a $36,000 balance by $7.50 per month. The spread over the pricing index continues to shrink, to .59% from .85% a year earlier
More respondents (44%) report offering home equity lines with the ability to fix drawn portions, the "loan in line" feature, compared to 29% last year. That feature allows consumers to draw down a portion of their line at a fixed rate, for instance, for the purchase of a vehicle.
The average size of new home equity line of credit approvals increased to $77,526, a 12% increase over last year's average of $69,513, according to the study.

Fed Rates Raised to 2 percent

The Fed's rate-setting committee raised the target federal funds rate a quarter point today, to 2 percent.

"With underlying inflation expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured," the Fed announced, in an acknowledgment that further increases will follow. "Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."

The increase will raise the prime rate to 5 percent. Consumer loans based upon the prime rate, like variable-rate credit cards, home equity lines of credit and auto loans, can be expected to rise about a quarter point.

Banking on your home

The Delaware News Journal has a good article on Home Equity Loans and how you might want to use them. Excerpt below:

A home can be both a burden and a blessing. Your mortgage is probably your biggest financial obligation. But if the value of your home has increased, your home could also represent a source of much-needed cash. Tips for homeowners:

• If you are worried about a pay cut or job loss, get a home equity line of credit now. It will be much harder to qualify for a loan after your salary is reduced or your job is eliminated.

• Once you've gotten a line of credit, treat it with care. If you fall behind, you could lose your home. Most lenders provide checks you can write against your home equity line, but that can lead to trouble, says Nancy Flint-Budde, a financial planner in Salem, N.Y. If you write a lot of checks to pay your bills, "You'll lose track of how much you're building up," she says.

• If you are already in debt, look for ways to reduce the cost. Home interest rates are still near record lows, so swapping credit card debt for a home loan can significantly lower your monthly bills. Just make sure you follow by destroying the credit cards.

• Consider downsizing to a smaller home, particularly if your home has gained in value.

• If you have an adjustable-rate mortgage and plan on remaining in your home, consider refinancing to a fixed rate. Adjustable-rate mortgages typically offer below-average rates in the first few years, then adjust to market rates. If your salary is stagnant or declining and you plan on remaining in your home for a while, locking in a fixed rate will protect you against payment shocks.

Survey finds 2004 the year of home equity lending

By Press Release Oct 26, 2004

According to a new consumer survey released by LendingTree, Inc. , the popularity and prevalence of home equity loans is on the rise, indicating that 2004 will become the year of the home equity loan.

The inaugural LendingTree Survey on Consumer Trends in Home Equity Lending polled a representative sample of homeowners, and results underscore the fact that borrowers have caught on to the financial value and versatility that home equity loans and lines of credit (HELOC) offer today's homeowner.

"It's clear that homeowners are becoming more sophisticated about tapping into their home's borrowing power," said LendingTree Chief Consumer Officer Brian Regan. "When used wisely, home equity loans are a sound choice for many consumers.

They can be used for virtually anything-from home repairs to college costs to debt consolidation, even buying a car or covering unexpected medical expenses-their interest rates are usually lower than other forms of credit, and the interest paid on the loan may be tax deductible."

Key findings of the survey include:

Home Equity Loans on the Rise: By the end of 2004, a projected 23.5% of respondents will have secured a home equity loan, double the number who did so in 2003. For comparison, 11.7% secured home equity loans in 2003, 6.7% in 2002, and 5.5% in 2001.

Home Equity Loans Equal Smart Debt: 55.4% considered home equity loans the most financially responsible lending option, as compared to 20% for personal loans,17.5% for mortgage refinancing with cash out option, and 7.1% for credit card loans.

Giving Credit to Lines of Credit: The popularity of home equity lines of credit has increased dramatically over the past decade. In just the first four months of 2004, 68.3% of homeowners selected a home equity line of credit instead of a home equity loan. For comparison, 37.5% selected HELOC in 1999, 23.1% in 1994.

Eligibility: Even though a majority of homeowners are eligible for home equity loans (approximately 80% according to industry estimates), a significant group of the homeowners surveyed didn't realize they were eligible.

More after the jump:

Of those surveyed, 35% were either unsure of their eligibility or certain they do not qualify for a home equity loan. According to LendingTree, many borrowers, depending on their credit, can qualify for a home equity loan even if they have no equity in their homes.

Understanding Home Equity Loans: As financially savvy as some homeowners have become, many are still confused about the specific characteristics of home equity loans. 80.2% of homeowners were unsure if a home equity loan and a second mortgage are the same thing.

Trading Bad Debt for Smart Debt: For those who secured a home equity loan for debt consolidation purposes, almost half (49.1%) indicated that their current financial circumstances had significantly improved. After that, 36.6% said their financial circumstances remained about the same.

Versatile Uses: The most popular uses for home equity loans were home improvement at 38.1%, debt consolidation at 31.9%, home purchase at 4.6%, auto purchase at 4.3%, college tuition at 2.9%, and small business expenses at 2.2%.

Creative Uses by Age and Demographic: Among 18-35 year-olds, 7.4% felt that a home equity loan would be a good tool for covering baby-related expenses.

Among 36-54 year-olds, 18.8% indicate home equity loans would be ideal for healthcare expenses, and 20.4% think they would be useful to cover college costs.

Among those ages 56 and over, 17.0% thought home equity loans would be ideal for a new auto purchase.

Internet Benefits: More than 44% of respondents used the Internet for financial/consumer transactions, and 71.3% of them cite convenience and speed as the primary benefit of using the Internet.

After speed and convenience, the ability to compare multiple offers was seen as the most beneficial aspect of using the Internet for consumer and financial transactions.

Research: After financial advisors at 33.6%, 21.3% considered the Internet the best method for conducting research on home equity loans.

A home equity loan, which is sometimes referred to as a second mortgage, is simply a one-time loan that is secured using the equity in the borrower's home as collateral (equity is the difference between the appraised value of the home and current principal balance of the mortgages on the property).

It typically bears a fixed interest rate for a fixed term with the same payments each month. Home equity loans make sense for major purchases and one-time projects such as a home renovation or auto purchase, when a borrower wants to lock in an interest rate over an extended period of time.

A home equity line of credit, which works somewhat like a credit card but is drawn against the equity in the home, allows a borrower to obtain cash as needed.

Monthly payments vary based on the fluctuating interest rate and the amount drawn against the loan. Home equity lines are often useful for long-term projects, or to cover ongoing costs such college tuition payments or unexpected costs such as medical expenses.

About the Consumer Trends in Home Equity Lending Survey

In its first annual survey on Consumer Trends in Home Equity Lending, LendingTree, via Insight Express, polled more than 800 homeowners in May 2004 and asked respondents to indicate their attitudes and experiences with home equity loans and lines of credit, and to compare them with other customary lending products. Additional results of the survey can be found at http://www.lendingtree.com/stm/aboutlt/pressreleases/pressroom-hesurvey2004.asp

Refinancing May Get New Life

The Lexington Herald-Leader has an interview suggesting that though the Fed is raising rates, refi's may increase:

An industry leader says mortgage rates have been falling and refinancing might get new life

Q: The Federal Reserve is raising interest rates again. What is the Fed trying to do?

A: When the Fed raises short-term rates, what that says to the market is that they're going to be aggressive in trying to control inflation. Long-term rates actually go down.

It's overlooked sometimes, but mortgage rates have been falling pretty steadily for about six weeks or two months. The 10-year Treasury note is down to levels they hadn't seen since early last spring.

Q: How long will that trend continue?

A: Our best guess is that we will see rates creep up over the next year.

To translate that into volumes, if you look at 2003 as a whole, nationwide, we originated $3.8 trillion in residential mortgages. This year, our best guess is that it will be closer to $2.6 trillion.

We'll still have the second-best year in the industry's history if we come in at $2.6 trillion. So, that's worth noting.

It's also worth noting that almost all of that reduction was at the expense of refinance (replacing an older mortgage with a new one to get a lower interest rate). "Refi" rates have dropped. Last year, about 65 percent of all mortgages were refi; this year, it will be closer to 35-40 percent.

So we're looking at a drop to $2.6 trillion in new mortgages this year, and then our best guess for 2005 is $1.8 trillion. Again, most of that decrease is going to come from the continued decrease in refis.

Now, all that having been said, there's a chance we'll go through another little refi blip here. If rates get much lower, there will be a lot of people who have gotten mortgages in the past year who will be good candidates to come in and refi. And you always have folks who are looking to refi and take cash out of their equity. This would be a good time to do it.

Bank of America Disaster Equity Credit Line

Posting another Press Release, this one from Bank of America - they have a disaster relief program that may help by providing additional Home Equity Credit or Home Equity Line of Credit:

Bank of America Contributes to Relief Efforts for Hurricane Ivan
Friday September 24, 4:29 pm ET

Bank continues customer disaster relief program

CHARLOTTE, N.C., Sept. 24 /PRNewswire/ -- The Bank of America Charitable Foundation today announced a $150,000 contribution to the American Red Cross Disaster Relief Fund to assist victims of Hurricane Ivan.

"When disasters such as these recent hurricanes occur, the American Red Cross is there providing emergency shelter, food and counseling," said Andrew Plepler, Bank of America Charitable Foundation president. "We're pleased to help the American Red Cross meet the acute needs our communities are facing at this time."

With this contribution, Bank of America Charitable Foundation has contributed $515,000 to the America Red Cross Disaster Relief Fund to assist relief efforts in the aftermath of Hurricanes Charley, Frances and Ivan, and Tropical Storm Gaston.

Bank of America banking centers nationwide continue to accept from the public financial donations for the American Red Cross Disaster Relief Fund. Bank of America Disaster Relief for Customers:

Under its customer disaster relief program, Bank of America customers in Florida who have been affected by Hurricanes Charley, Frances and Ivan may be able to qualify for several product or loan programs. In addition, Virginia customers impacted by Tropical Storm Gaston residing or owning businesses in the city of Richmond, or Chesterfield, Hanover or Henrico Counties, may also use these programs.
* Borrow from $5,000 to $25,000 at preferential pricing below the current
rate and incur no fees or points with a special Bank of America home
equity loan program.

* Increase their existing Bank of America home equity line of credit up
to $25,000.

* Avoid bank withdrawal penalties on time deposits and existing Bank of
America Individual Retirement Accounts (IRAs).

* Qualified customers may receive emergency credit line increases and
special assistance on monthly payments on their existing Bank of
America Visa or MasterCard.

* Small businesses can enjoy similar benefits on both business and
personal loans.

* Customers needing assistance on existing consumer, home loan, or Small
Business Loans 1.800.831.5586, information about new business loans
1.800.360.5080 and information about the special home equity loan
program 1.800.900.9000.

The above loans are subject to credit approval and normal credit standards apply. These offers cannot be used in combination with other offers, and certain restrictions may apply. This program is available through October 31, 2004. Additional tax penalties may still apply to IRA withdrawals before age 59.