Your Mortgage : MORTGAGE Q&A; : Refinancing Can Pay If Interest Sliced by 2%
QUESTION: Our home mortgage has an 11.25% fixed-interest rate. I saw in the newspapers that some lenders are advertising home loans around 8.5% interest. Do you think we should refinance?
ANSWER: The general rule is it pays to refinance a home mortgage when you can reduce the interest rate at least 2% and repay finance costs within three years from payment savings. However, the 8.5% interest rate you saw advertised is probably an adjustable-rate mortgage teaser rate and is not the bargain you may think.
This low teaser interest rate usually applies to just the first three to six months. After that the ARM adjusts to the index plus a margin.
For example, an ARM tied to the cost of funds index with a 2.0 margin would cost about 9.4% after the teaser rate period. I don’t think the risk of switching to an ARM makes it desirable for you to refinance at this time.
Where to Find Data on Reverse Mortgages
Q: My mother, age 68, owns her home free and clear, but she needs more income to live on. As I am a teacher, I don’t earn enough to help her. But I heard about “reverse mortgages” where elderly people can borrow on their home equity. Where can I get a list of lenders making these loans?
A: Most reverse mortgage lenders advertise in each issue of Modern Maturity magazine, published by the American Assn. of Retired People (AARP). If your mother is not a member of AARP, she should be, since it is an excellent organization and the cost is only $5 per year. You can read their superb magazine at your local public library.
Mortgage Broker Says Most Are Honest
Q: As a mortgage broker, I feel you have been unduly harsh on mortgage brokers. We perform a valuable service of finding mortgage loans for property buyers. By shopping among several dozen lenders, often more, we can find borrowers the best interest rate and loan terms to meet their circumstances.
But I feel you too often focus on the few “bait and switch” mortgage brokers who give our industry a bad name. Every field, such as doctors, lawyers and real estate agents, have their bad apples and mortgage brokers are no exception. However, most of us are hard-working and honest with the best interests of the clients in mind. Won’t you give the mortgage broker’s side of the story?
A: You just did. Being a mortgage broker is a very difficult job. It is an unstable industry, with a very high turnover of mortgage agents and firms. The S&L; fiasco is creating more uncertainty as lenders come and go.
Mortgage brokers are middlemen between borrowers and lenders. Although a mortgage broker may, in all honesty, quote specific loan terms to borrowers, lenders often change these terms before the borrower can apply for a mortgage and lock in the quoted loan terms.
However, I know some dishonest mortgage brokers who have told me they will do virtually anything within the law to get borrower loan applications. They have no bad feelings about informing the borrower, usually just a few days before the scheduled closing date when it is too late for the borrower to get a loan elsewhere, that the lender has changed the mortgage terms, take it or leave it.
With mortgage loan volume down, due to a slow home sales market in most cities, many mortgage brokers will soon close their doors for lack of business. But the reputable mortgage brokers, as I am sure you are, will survive. Please be assured I do not criticize mortgage brokers without justification.
Books Recommended on Discount Mortgages
Q: Some time ago you wrote about the high yields available from buying existing mortgages at a discount. While the yields of 20% or more are attractive, I feel I need more information. Are there any good books on discounted mortgages you recommend?
A: The best book on discounted mortgages is Jimmy Napier’s simple, but very profitable “Invest in Debt.” It is not sold in bookstores, but is available from Jim Napier Inc., PO Drawer F, Chipley, Fla. 32428 for $12 postpaid.
Another excellent book is “The Number One Real Estate Investment No One Talks About” by Sanford W. Hornwood and I. Lucretia Hollingsworth (Prentice Hall), available in paperback by special order from local bookstores.
Borrowing 100% of Equity Isn’t Easy Q: About two years ago, I bought a condo for 10% down and a 90% mortgage. Fortunately, the condo has gone up in value and is worth at least $5,000 more than I paid. I have about $20,000 equity. If I borrow the $20,000 on a home-equity loan, will my interest be tax deductible?
A: Yes. Interest on a home-equity loan, secured by your personal residence up to $100,000, is tax-deductible on your federal income tax returns. But please tell us where you can get a 100% home-equity loan. I would like to get one of those, too. Most home-equity lenders will only loan up to 75% or 80% of the home’s market value, although a few finance companies will loan up to 85%.
There Are 2 Types of Home-Equity Loans
Q: Some time ago you recommended that homeowners obtain a home-equity credit line. My banker said her bank offers home equity loans, but not credit lines. I can qualify for up to a $60,000 home-equity loan. Do you think I should take it?
A: You’re at the wrong bank. Every bank should offer both home-equity loans for a fixed amount and the more flexible home-equity credit lines.
The big advantage of the home-equity credit lines is that you can borrow the money when you need it. If you don’t need any money it is available, but it doesn’t cost you any interest. I can’t say enough good things about the home-equity credit line loans.
Bank Will Not Grant Assumable Mortgage
Q: Two years ago, we got an adjustable-rate mortgage that, we were told, would be assumable by a buyer when we decided to sell our condo. We thought this would be a major advantage. We put our condo up for sale and it sold quickly, partly due to the assumable mortgage.
However, the lender (a major national bank) refused to accept our buyer, claiming the buyer’s credit is not good. We saw the buyer’s credit report, and he only has one credit problem, which was a department store dispute about defective merchandise for which he refused to pay. What can we do?
A: Other than a lawsuit against your lender for breach of contract damages, there isn’t much you can do except complain very loudly to the lender who isn’t living up to the contract.
You also may want to find out if the loan has been sold in the secondary mortgage market, such as to Fannie Mae or Freddie Mac.
If so, contact the owner of your loan for assistance. But I suspect the true problem is the lender wants to get out of your loan, perhaps because most lenders don’t like condo loans.
Questions and comments may be sent to the Real Estate Editor, Los Angeles Times, Times Mirror Square, Los Angeles 90053.
