Bond market volatility has quieted down, and so there has been little change in Orion’s mortgage rates for the last few weeks. There is something that Orion’s management is keeping an eye on, however, and that is during the next few weeks “Central banks” around the world will be busy. Monetary policy statements and interest rate decisions are expected from the Bank of Japan, European Central Bank, and Bank of Canada. In the U.S., Federal Reserve members will be in a blackout period of no public talks ahead of the next Federal Open Market Committee meeting is on January 30-31.

Meanwhile, Orion’s brokers are seeing a continued interest in refinances. Brokers know that borrowers who withdraw cash when they refinance are viewed as riskier than those who don't, because the cash withdrawal indicates possible financial distress (did they run up credit card costs, paying 25-30 percent interest on that debt?) and that perception can raise a borrower's costs. This causes the rate on cash-out deals to be higher than on no-cash deals that are otherwise identical.

The price difference is particularly large when the borrower's credit score is low. However, brokers know that refinancing borrowers can increase their loan balance by enough to cover their settlement costs without the loan being classified as "cash-out." The borrower must literally walk away with cash for the transaction to be "cash-out." Whether or not cash is withdrawn is entirely within the borrower's discretion, but often the cost of the money they take out of the refinance is underestimated as they view the cost as the rate on the new mortgage, ignoring the higher cost on the existing loan balance.

Remember, a cash-out deal raises the LTV. If your client must pay a higher mortgage insurance premium at the new LTV, the cost of the cash taken out would be raised even more. The mortgage interest rate is not usually affected by the LTV, but if the ratio is above 80 percent, the borrower must pay for mortgage insurance. The insurance premium rises with the LTV and is also subject to the same risk factors as the mortgage rate.

Brokers know that borrowers with low credit scores, for example, will pay higher mortgage insurance premiums. If they intend to finance their closing costs, and especially if they intend to take cash out, they should make sure that this will not breach a notch point and raise their cost. If they find that their loan-to-value ratio is just above a notch point (say, 85.1 percent) they should beg or borrow the amount needed to reduce the loan amount to the lower price bracket. It would be a very high-yield investment. Borrowers with LTVs over 80 should make sure that they are not paying more than necessary for mortgage insurance.

This is yet another great opportunity for brokers to add value by working with the borrower by checking the premium quoted. You are aware most lenders only quote monthly premiums, even though in some cases the single premium plan would be less costly to the borrower.

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