Saturday, August 14, 2004

Money/Getting to Yes
By Juliette Fairley

When Maria Villafane's finances spiraled out of control in January 2004, she appealed to her long-time traditional bank for a consolidation equity loan of $500,000.

Her Fort Green, Brooklyn, four-family home was worth $1 million, but the bank loan officer rejected her application, saying her $35,000 credit card debt was too high. (An irony given that she needed the money to help pay off her credit cards.)

"I felt betrayed because I'd been with them for a while now, but they didn't support me or care about my situation," she says.

A month later, the New York City Board of Education executive assistant resorted to a specialty lender who approved her refinancing request right away, at an 8.35 percent interest rate.

"I was afraid it would be a scam but I got immediate help from the beginning to the end. It was the best decision I ever made," Villafane says.

With the proceeds from the refinancing, Villafane paid off the higher interest credit card debt (which was costing her $900 a month in payments) and the $145,000 mortgage on a second property. While her monthly mortgage payment went up to $4,026 per month - from $3,003 - she appreciates the freedom of having consolidated her bills.

Villafane's loan is one of many refinancings. In the second quarter of 2004, they totaled $601 billion, according to the Mortgage Bankers Association.

To pull off those refinancings, borrowers who have credit problems (or who are unemployed, self-employed or have no income verification) use specialty lenders, also known as sub-prime lenders.

"Sub-prime" is an industry term for borrowers who have worse credit, and therefore receive higher interest rates, than good quality or "prime" borrowers. Historically, sub-prime loans come with interest rates ranging from a quarter of a percent to 3 percent higher than those charged to borrowers with a good credit history.

Michael Moskowitz, president of Equity Now, a Manhattan-based specialty mortgage lender, has seen a 40 percent increase in his refinancing business since 2001, which he attributes largely to the recession.

"The recession created a larger number of sub-prime people, but it took a while for them to come into the borrowing market, which they are doing now," he says.

He advises borrowers to get a quote for the rate of a loan and closing cost points. For example, if the house is worth $700,000, a loan of $300,000 at 6.2 percent interest rate will cost about $15,000 to close. Villafane's closing cost was $18,000.

Rates on sub-prime loans can also vary according to the loan-to-value ratio: how much money you want to borrow compared with the full value of the house.