Many rush to refinance homes

By Deborah Adamson
Advertiser Staff Writer

Craig Watase joined an elite group of homeowners in this era of rock-bottom mortgage interest rates: the multiple refinancing club.

Craig Watase, with daughter Nicole and son Kyle, likes living in Niu Valley in East Honolulu. Watase, 40, a real estate developer, has refinanced his home twice to take advantage of the low mortgage rates. Deborah Booker • The Honolulu Advertiser

"I'm watching the rates and the fixed, 5-year adjustable rate mortgage dropped," Watase said. "My rate went from 6 percent to 4.25 percent. I saved $300 a month."

Mortgage rates have hit record lows yet again. In Hawai'i, the average 30-year mortgage annual percentage rate has fallen to a record 5 percent, according to a survey of 46 statewide lenders by the Honolulu Board of Realtors.

Such rock-bottom rates, the lowest in more than 40 years, have brought homeowners out in droves again to seek savings.

"This last dip has re-energized the refi market to levels that we've never seen before," said Russell Miyashiro, senior vice president of residential loans at Finance Factors. "People are refinancing two or three times within 12 months."

Housing market hot

Title companies are taking about three weeks or longer, Miyashiro said. It used to be a week.

"Everybody's deluged with applications," said Miyashiro, whose company's business has doubled in a year.

He said that you can expect a timely loan to close in 30 days to 45 days. During pre-boom times the deal can be done within a month.

Particularly active, in sales and refinancings, are the resort areas of Maui, Kona on the Big Island and parts of Kaua'i, Miyashiro said.

He's so busy that he hasn't had time to refinance his own mortgage.

Hawaii Home Loans sees a similar surge in business, with activity hitting a company record in May.

"Both the refi and purchase market continue to be as strong as ever," said President Tom Zimmerman. "May was our largest funding month."

Thinking of jumping into the refinancing fray? With so many options to choose from, it's tempting to pick the lowest rate offered, even if you've never heard of the lender.

"Our business has a lot of people who lie," said Randy Johnson, a Newport Beach, Calif.-based mortgage broker and author of "How to Save Thousands of Dollars on Your Home Mortgage."

If the package sounds a lot better than many others on the market, you're likely not being told the full story, Johnson said. About 85 percent of the loans are resold to Fannie Mae or Freddie Mac, so the cost of the loan is the same to lenders. The difference is the lender, broker or banker markups, he said.

In particular, be careful about "no points" or "no fees" loans, he said.

The fees don't go away; the escrow company, appraiser and others involved in the loan processing still need to be paid, Johnson said. You still could end up paying them, with the costs bundled into your loan assessed at a higher rate. These rates almost always are described as "slightly" higher, but over time it adds up to a lot, he added.

So start with someone honest and competent, he said. Get referrals from friends. If you feel more comfortable getting a refinance from your current mortgage lender, such as a bank, make sure the person helping you is experienced and wasn't just briefly trained for the job.

Check whether a company has any complaints by calling the state.

Double-check numbers

Francisco Flores, a 41-year-old Honolulu resident, almost paid an extra $1,100 in fees because his out-of-state lender changed the terms of his loan without telling him.

He applied for a refinance, but before the loan closed, the rates dropped again. Flores asked the lender to give him the new rate and assumed the rest of the loan package remained the same. But in a quick phone call to the lender, Flores asked for a run down of costs and caught the extra charge.

If he didn't have a business background and pick out the extra fee, he said he would have signed the complicated loan documents and unwittingly paid another $1,100. The lender said it was an error and erased the fee, but the trust is gone.

"I'm so angry," Flores said. "They shouldn't be doing that. There shouldn't be fees they didn't discuss."

His warning to other homeowners: "What matters is not what's said on the phone, it's what's on paper."

So take your time to review the documents and make sure all blank spaces are filled in before signing. Find out about any prepayment penalties. Moreover, don't assume that if you're dealing with a household name or a big institution that you don't need to double check.

The lender is required by federal law to disclose all estimated costs and fees to you in writing. It's called the "Good Faith Estimate." Make sure when you see the final costs, there are no surprise fees, Johnson said. If the fees end up higher, ask for an explanation.

Weigh costs, rewards

When looking at the APR, it's best to compare similar types of loans.

After narrowing down your choice of loans, always crunch the numbers to see which one would save you the most money overall. Don't make assumptions based on a cursory inspection of the terms. A loan with the lowest points might not always be the best deal for you.

Let's say you're looking to refi a $100,000 mortgage — what you still owe on your home. Two lenders are offering 5.5 percent for a 30-year fixed. You have to pay Lender A two points plus $1,500 in other fees. Lender B is asking for 2.25 points and $1,000.

Lender B, although you have to pay higher points, ends up being cheaper at $3,250 ($100,000 x 0.0225 + $1,000) vs. Lender A's $3,500 ($100,000 x 0.02 + $1,500).

Remember that if you plan to stay at your residence for more than four years, consider paying the fees up front, Johnson said. If you choose to pay for them over the life of the loan, you could end up forking over more in the long run.

Also, make sure that you'll benefit from a refinance. In general, if you plan to stay in your home for at least three years, it could be worthwhile to refinance, Johnson said. To be certain, do the math.

If it would cost you $3,000 to refinance and you're saving $300 a month, for instance, it would take 10 months to recoup your costs. You have to stay put for more than 10 months to come out ahead.

As for the interest rate, consider asking the lender to lock in the rate you were promised for at least 60 days, said W. Frazier Bell, a mortgage banker and author of "How to Get the Best Home Loan."

But you'll end up paying more points for a longer lock, Johnson said. Weigh the costs and rewards.

If you hold a 30-year fixed rate mortgage, it makes sense to jump into another fixed-rate loan the longer you plan to stay at your residence. If you plan to sell your house in a few years and retire elsewhere, an intermediate adjustable rate mortgage could be a better option — one whose rates are fixed for a number of years.

With ARMs, savings on monthly payments can be used for other expenses or plowed into investments. Or, you could stash the extra cash in an interest-bearing account and apply the money later toward your principal to pay it off faster.

Here's another strategy: When you refinance, don't focus on merely lowering your monthly payments. That's a mistake many people make, Johnson said. Consider maintaining or raising your payments if you can get a shorter-term loan. You'll save on interest overall.

Johnson uses the example of a teacher who's five years into a $200,000, 30-year loan with an interest rate of 7.5 percent. Her monthly payment was $1,400. She still has $189,000 to repay. With a 30-year loan at 6.625 percent her payments would fall to $1,200.

It sounds good until you figure in how much she'll pay in three decades. Under her old loan, she still owes $230,000 in interest over 25 years. With the new loan, she would owe $246,600 because she'll have 60 more payments.

If the teacher chooses to refinance into a 15-year loan at 6.125 percent, her interest payments would total $100,000. She saved $130,000 over her old loan even if monthly payments rose by $200.

Borrow only for what you owe

Refinancing could also eliminate the extra you pay for private mortgage insurance, or PMI, each month. If your down payment for a house wasn't at least 20 percent, you're paying extra each month for insurance — it's a protection for the lender. But with a refinance, you might be able to kiss your PMI goodbye, as long as you have equity in your house, Bell said.

Let's say you bought a condominium for $100,000 with $5,000 down, he said. That means you're financing 95 percent of the unit. After a few years, you still owe $90,000 but your condo is now worth $125,000. You refinance the $90,000, which is 72 percent of the appraised $125,000 value. Since you're financing less than 80 percent of the condo's value, you are free of PMI.

Many people refinance for more than what they owe because they could use the extra money for home improvement or other expenses. Perhaps they want to use the money to pay off a credit card. Whatever you use the money for, make sure you don't end up paying much more in the long run, Johnson said.

For example, if you owe $150,000 on your house and you decide to take out $185,000 because you would like to buy a new SUV. You'll save more money overall if you pay off the car portion at an accelerated rate — say in five years — instead of taking 30 years, Johnson said.