At the forefront of our new mortgage market generation is the Automatic Rate Cut (ARC) loan offered by a national bank for most locations in the United States. What separates this mortgage from the norm is that at any time interest rates drop more than 1/4%, the loan is recast at the lower rate.
Has it been ten years since you purchased your home? How many times did you refinance to get a lower interest rate and how much did it cost in equity or out of pocket expense?
Many homeowners have been devastated by our most recent downturn in real estate values, and the lenders have been traumatized as well. Certainly, it is difficult for those who are currently “under water” on their mortgages to have sympathy for the lending hierarchy that created this dilemma for the housing public. Fortunately, signs of recovery are being seen in many locations. Some major cities and their suburbs actually declared an increase in residential sales volume and in sales prices during 2010. Low interest rates and reduced property values have fostered a fluid buyer’s market influenced by basic economic “supply vs. demand” principles.
There is additional exciting, good news. The lending hierarchy is beginning to make adjustments to its mortgage products that really make sense. At the forefront of our new mortgage market generation is the Automatic Rate Cut (ARC) loan offered by a national bank for most locations in the United States. ARC is offering cutting edge of the market interest rates on all of the standard FNMA/FHLMC 30 year and 15 year fixed rate loan programs including conventional, FHA, and VA mortgages. What separates this mortgage from the norm is that at any time interest rates drop more than 1/4%, the loan is recast at the lower rate. This mortgage product is promoted as “the only loan you will ever need”. Because it is not a refinance, there are no loan fees or closing costs. ARC simply recasts the interest rate. Refinancing creates a new loan and the payment schedule or amortization starts over at year one. The ARC loan does not. If the current mortgage is 5 years into a 30 year amortization, the new rate and subsequent lower payment does not change the term so the loan will be paid off in 25 years instead of 30 years as with the refinance. What a financial break that is for the mortgagee!
It is very simple. Why didn’t the financial wizards think of this earlier? As did just about everyone associated with mortgage banking, it is with certainty that they probably did think of this solution; however, there are reasons that many creative innovations are not introduced to the public. It has much to do with how the financial markets are structured. The overwhelming majority of standard mortgages are securitized by FNMA and other institutional investors; investments in these loan pools are sold to other investors through investment firms. What makes these investments attractive to end investors is a guaranteed rate of return from the institution creating the security. If the interest rate is on all of the loans in the pool is recast at one time, which could be the case with the ARC loan, the rate of return on investment is reduced and the entity creating the security cannot justify guaranteeing or warranting the return to the end investor. This is an oversimplification, but the bottom line is that certain creative loan products do not fit into the financial market’s structure.
The ARC loan structure can be applied to standard mortgage products including VA, FHA and conventional programs. It simply applies an interest rate adjustment when rates drop below the original interest rate. No matter how low the rate is adjusted, the rate never goes back up.
Even if interest rates are currently at their lowest level as some market follower’s project, the ARC mortgage is a great safety net. As long as the interest rates and loan fees compare favorably with other lenders who do not offer this innovation, it certainly should be a consideration when searching for a mortgage.