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The Honolulu Advertiser
Posted on: Sunday, March 9, 2003

'Double-refi's on the rise

By John Duchemin
Advertiser Staff Writer

Historically low mortgage rates last year brought a refinancing boom. Even lower rates this year could bring a re-refinancing boom.

In 2002, thousands of Hawai'i homeowners refinanced their homes, using lower-rate loans to pay off earlier loans that came withhigher interest rates — and saving hundreds of dollars a month by doing so.

But rates have dropped so low this year that many borrowers who refinanced last year are discovering that it makes financial sense to refinance again.

Since late 2000, mortgage rates offered by Honolulu lenders have fallen by more than 2 percentage points. On Dec. 6, 2000, annual percentage rates for 30-year home loans were averaging 7.44 percent, according to Honolulu Board of Realtors data.

As of Wednesday, 30-year rates averaged 5.5 percent, freakishly low by historical standards for that kind of loan. Nationwide, mortgage rates are the lowest on record since 1971 when lending institution Freddie Mac began keeping track.

In this unprecedented environment, lenders say they are getting business from 'double-refi' customers — people who already refinanced last year but are coming back for a second helping of even lower rates, despite potentially thousands of dollars in additional fees.

"We're seeing people come back for their second or third time," said Jon Whittington, vice president and Hawai'i manager for Countrywide Home Loans, Hawai'i's second-largest mortgage lender. "Interest rates are such that another 'refi' will pay for itself in a time frame that's acceptable to them."

To refi or not

Refinancing transactions usually aren't cheap. To draw up the new loan, homeowners may need to re-appraise their home or buy a new title, and lenders will usually demand refinancing fees, pushing the typical transaction cost to $1,000 or more.

Most borrowers thus don't bother to refinance if interest rates have dropped by trivial amounts; the potential gain just isn't enough to outweigh the refi costs. As a general rule of thumb, a 1 percent difference between an existing interest rate and the current rate is enough to warrant another look at refinancing.

The recent magnitude of shifts in interest rates has been such that many homeowners have been able to shave $100 or more per month off their loan costs. That means they can probably make up for the refi costs within a year or less, said John Gray, executive vice president in charge of residential lending for Bank of Hawaii, the state's largest mortgage lender.

"If someone refinanced in the first half of last year, they probably wouldn't normally pay attention to the further decreases," Gray said. "But rates have gone down a full percentage point from 12 months ago. ... People are thinking, 'It may well make sense to do this again.' "

Gray said Bank of Hawaii has seen several hundred refinance applications each month since last fall — about twice to three times the normal volume.

Business booms

Along with a strong new-homes purchase market, the refinancing boom has lenders doing business at a frenzied pace. It has created job growth, and even the semblance of a labor shortage in the financial and real estate sectors, belying an otherwise humdrum economy.

Countrywide's Whittington, whose office has expanded from three employees to 36 since 1997, says he can't find enough qualified people to fill job openings.

Despite the increased activity, lenders aren't convinced refinancing activity will continue at its torrid pace. Interest rates could increase at any time and few people will want to refinance if they would be locking in a higher rate than before.

Changes in interest rates are closely tied to shifts in the global stock and bond markets. The current environment of low rates comes because investors, fearing geopolitical uncertainty, a poor economy, a war on Iraq, and those events' potential dampening effect on stocks, have shifted massive amounts of money from stocks into bonds since 2001.

This increased demand on the bond market has caused bond interest rates to drop, because people are willing to pay relatively more for the stream of income from a bond's interest.

Mortgage rates, which are pegged to the interest rate on 10-year bonds, have fallen as well.

Given the massive recent fall-off, bankers such as Gray are cautiously inclined to expect a rise back to historical interest rate levels if economic stability returns.

"One day, rates will go up, but at this point we don't know when," he said. "We've been continually pushing that forecast back. With things being so unsettled, especially with Iraq, we're just not sure what will happen."

Reach John Duchemin at 525-8062 or by e-mail at jduchemin@honoluluadvertiser.com.