Most of the time, borrowers stampede to lenders' doors when interest rates show the first indication of a continuing up tick. That's because consumers do not want to be left on the sidelines if they sense the bottom now is behind them.
It's not unlike an investor seeing a soaring stock finally turn south. Many believe it's wise to sell and pocket a tidy profit instead of running the risk of a further loss in value.
While rates have yo-yoed the past few weeks, major lenders reported a huge drop-off in loan volume for the past quarter as a result of the initial up tick. How did they respond? By suggesting intriguing alternatives to the popular 30-year fixed rate loan.
One of them, commonly known as an "80-10-10" mortgage, is a flexible vehicle that bypasses the need for mortgage insurance and has been a boon for second home buyers. Even though borrowers only must provide 10 percent of the loan amount up front, they are not required to purchase mortgage insurance because the remaining 10 percent of the down payment comes in the form of a fully funded line of credit. Usually, borrowers need to put down at least 20 percent of the purchase price to avoid mortgage insurance.
For example, if a family wishes to purchase a recreational retreat priced at $200,000, the family would have to come out of pocket $40,000 to avoid mortgage insurance. Under the 80-10-10 program, the family would be required to make a down payment of $20,000 and a second lien in the amount of $20,000 would be also placed on the property. The second loan is really a line of credit that has been "maxed out'' at closing yet can repaid at any time.
The loan would provide greater options for buyers who do not have the funds to purchase and make improvements or purchase furniture. Instead of using the entire 20 percent for the down payment, borrowers could remodel and purchase needed home furnishings with all or a portion of the "second $20,000" that would have been required upfront as the down payment.
The interest rate on the first mortgage ($20,000) would be at a conventional rate - fixed or adjustable. The rate on the second $20,000 would be a floating rate, often adjusting monthly and typically tied to the prime rate.
"It's a great option for people wanting a second home or for those people who need to buy before their current home hasn't sold,'' said Washington Mutual's Eric Aasness. "Borrowers can use this loan in lieu of a more expensive bridge loan.''
A bridge loan is a temporary mortgage that leverages both the current home and the buyer's new home. These loans can be expensive to obtain. Instead of taking out a bridge loan, borrowers can simply draw on their line of credit in the 80-10-10 loan for the downpayment on the new home.
Just how much did the July and August rate rise impact the mortgage industry? Washington Mutual reported its fixed-rate mortgage loan
applications fell nearly 40 percent in August compared with July. Still the lender's total home loan volume was $108 billion in the second quarter. Another major player, Countrywide Financial Corp., based in Calabasas, Calif., reported average daily loan applications fell 28 percent to $1.8 billion from the previous month's $2.5 billion.
The loss of mortgage loan applications came as no surprise to the industry. When rates rose, most lenders said they would turn to diversified products and focus on lines of credit and adjustable rate mortgages. The 80-10-10 offers both in one package.
"It's really a loan for just about everybody,'' said Vijay Lala,
Countrywide's vice president for loan development. "It can help lower down buyers, seniors who want to keep cash in the bank . . . anybody.
"And, there's no real reason to pay mortgage insurance on the typical loan. It is not tax deductible and benefits the lender, not the borrower. Why not take advantage of the tax deduction if you can?''
Tax deductions? I'll listen - regardless of the interest rate environment.
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Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk show host. He can be reached by email at news@tomkelly.com or through his website at www.tomkelly.com.