Automatic rate reduction loans, or ARRs, can be a formidable weapon against
volatile mortgage markets.
In recent weeks, after interest rates appeared to be heading up to 9 percent, a mortgage market about-face pushed rates back down to nearly
8 percent.
If you had a 9 percent ARR on a conforming loan of about $250,000, you'd now be paying about $100 less each month without refinancing or facing
a penalty for paying off the mortgage early.
Like an adjustable-rate mortgage, interest rates on ARR loans fall when
other rates drop, just as ARMs go up with a rising market.
With an ARR, however, once the rate is down, it can't go back up. But it can dip even lower.
Borrowers With Good Records: ARR loans are for prime borrowers
with pristine credit records.
"If we have a product where the initial rate is the cap rate, and if rates can only decline, then consumers will plainly want to consider this
loan option," says Peter Miller, the Silver Spring, Md., author of Common Sense Mortgage.
Even after only one payment, a lower rate could be available to homeowners with a "declining rate loan" from San Diego-based City Line Mortgage.
"It's whenever they request it. If the borrower has a loan of $250,000
and they want to drop their loan a quarter-percent, we don't require them
to re-qualify, and this only takes a day," says Jim Riley, City Line's
chief executive officer.
Riley says borrowers must have A-1 credit records and an unblemished
payment history.
Low Cost: Fees for a new rate depend on the locale but typically
include only the costs of buying title insurance and filing a new deed
of trust.
In many states the fee is $700 to $800, but in Arizona it's only $400.
The fee is higher in New York, Riley says.
So what's the catch?
Some lenders, including City Line, won't write ARRs for jumbo loans,
Federal Housing Administration and Veterans Administration loans. Some
ARRs require longer waiting periods before rates are allowed to drop.
And ARRs invariably come with starting rates that are 0.50 to 0.75 percent
higher than going fixed-rate mortgages, along with the going level of
points.
So even when market rates drop, AARs can stall above the going rate.
The Fairfax, Va.-based National City Mortgage's ARC Loan (for "automatic
rate cut"), for example, is available for jumbos, FHAs and VAs, but on
a conforming loan it would cost about 8.75 percent.
Market rates are closer to 8.25 percent. The loan also makes homeowners
wait four months between rate reductions, says Vice President Joe Kelly.
That can leave the borrower with a mortgage out of synch with the current
market. For example, suppose market rates are 8 percent and the ARR mortgage
is 8.5 percent. If market rates drop to 7.5 percent and the ARR drops
to 7.75 percent, the ARR rate might not be the best rate in the market.
ARR lenders have designed the loans primarily to generate customer loyalty,
especially during heavy refinance periods when lenders lose droves of
borrowers seeking cheaper rates.
