Re-Re-Refi

In the last two years, the mortgage interest rates have been dropping in what lenders see as “waves.” The first wave hit in August, 1991, when rates on 30-year fixed mortgages fell to 9% from about 10 1/2%. The second wave, in February, 1992, lowered rates to about 8% from about 9%. And in January of 1993, the third wave brought rates into the low 7% range.

With each wave of rate cuts came a wave of refinancing as homeowners rushed to take advantage of the “historic” new rates. Some want to lock in a lower-rate fixed loan while others are opting for adjustable loans with caps at or below the rate on their current fixed. Still others want to switch to a 15-year mortgage.

According to the Federal National Mortgage Assn. (Fannie Mae), one in five U.S. homeowners has refinanced in the last 18 months, many of them for a second or third time.

“I have a lot of customers in their third wave of refinancing,” said Bob Sheets, co-owner of Golden West Mortgage in Woodland Hills.

For some homeowners, whose original mortgage rates were in the mid-teens, these low rates “make them feel like kids in a candy store,” said Stan Goodfriend, owner of Goodfriend Financial Services in Beverly Hills. “They remember back to 1984 when an adjustable-rate loan had a teaser rate of 13% and a cap of 18%.” Now these same homeowners are being teased with adjustable loans that start at 4 1/2% and cap at 9%.

Judy Fox, a cantor, and her husband, Herschel, a clergyman, bought their North Hollywood home in 1988 for $335,000 with an adjustable-rate mortgage at 10.38%. When they refinanced in 1991 their main reason was to secure a fixed 30-year loan at the new lower rates of 9%. “We liked the idea of a lower monthly payment,” said Fox. “We saved about a $100 a month to play with.”

These days, that 9% fixed loan doesn’t seem like such a deal. Since the Foxes don’t plan to move for a long time, being locked into a low rate for the life of the loan is very important to them.

So it was back to the mortgage broker again. They’ve just closed escrow on a new 30-year fixed loan at 7.625%. This second refinancing has brought their monthly payment down from $1,931 to $1,698.

The Foxes, like many other homeowners who are refinancing for a second and third time in the last few years, ignored the traditional 2% rule.

“The standard approach of not considering a new loan unless you’re going down at least 2% is not necessarily true in every situation,” said John Lucas, vice president of ARCS Mortgage Inc. in Van Nuys.

“Even if the new loan is only 1% lower, if you stay in the house 10-15 years, it’s worth it. It pays for itself after one or two years,” Goodfriend said.

So, is it smart to refinance again and again? After all, even with the low closing costs and low, or no, points that most lenders are offering these days, it still costs the homeowner something to refinance.

“Every time you make the decision to refinance, you ask yourself the same question,” Lucas said. “If there’s a lower interest rate available, will you recapture your costs of the refinancing in a reasonable amount of time?

“Find out what rates and terms are available. Calculate what you will need to spend to get the loan--not necessarily out-of-pocket. Most costs can be folded back into the loan,” Lucas said.

“The absolute key” in deciding to refinance a second and third time, Goodfriend said, “is how long you plan to stay in your home.” If you answer “they’ll have to carry me out,” he suggests getting into a fixed loan, now running between 7% and 7.5%.

Bert and Linda Glatstein bought their Pasadena home in 1985 when they were able to get a 10% loan. They didn’t refinance again until March, 1992, when they took out an 8 1/4% fixed. Their loan was calculated on a 30-year payment schedule but the entire loan balance was due in seven years. They opted for those terms to get a lower rate and to pay off a line of credit while keeping their monthly payments at about the same amount. But since they expect to be in the house for “a long time,” they knew they’d be faced with another refinancing when the loan became due.

The solution: to refinance a second time.

The Glatsteins just closed escrow on a fixed loan at 7 3/8%. “We did it to lock in the rate for 30 years not just 7,” said Glatstein. “We like where we live. We won’t move unless I win the lottery. We had no out-of-pocket costs. And we didn’t pay any points. The costs were about $2,500, which we figure we’ll have paid back in two years.” And they’ve cut their monthly payment by $100.

Paul Sakamoto and his wife, Gail, bought a fixer-upper in Venice in 1986 for $212,000 and have refinanced three times. The first two refis were to complete ambitious remodeling projects they’d started with their own savings.

Sakamoto, chief accounting officer with the Community Redevelopment Agency, wishes they’d had the foresight to roll those two refinancings into one. But he has no second thoughts about his third refinancing, which just recently closed escrow.

His two remodel refinancings were at 10% and 9 3/8%. “After the second one, I said, ‘That’s the last time.’ Then rates came down substantially.”

The Sakamotos’ original mortgage and first two refinancings were at fixed rates but now the Sakamotos “went for an adjustable at 6% for one point.” They plan to stay in their home at least 10 years and at first thought they should look for another fixed. “We talked about it for a month or so,” Sakamoto said, “and decided to go with a variable.”

They went against the prevailing notion that those who plan to stay put should lock into a fixed loan because they plan to make substantially higher monthly payments to pay off the loan early. They are willing to take the chance with changing interest rates because they, and their broker Bob Sheets, feel that “rates won’t go crazy.”

Their extra payments will figure in the recalculating of the principal, done every six months in adjustable loans. (With a fixed loan, the principal and monthly payment remain fixed for the life of the loan.)

While re-refinancing can mean whittling hundreds of dollars off the monthly payment, many homeowners are choosing to continue paying at their old amount like the Sakamotos, Sheets said. “They want to pay off the loan quicker and this gives them a shot at it,” he said.

Unfortunately, a substantial number of would-be re-refinancers are locked out of the market. “A lot of people just do not have the ability to refinance now because of value,” Lucas said. He’s talking about people who bought in 1989, ‘90, ‘91, when prices were soaring. “This is especially true with people who bought with a minimum down,” he said. “We just cannot accommodate those with 80%-90% loans.”

Sheets says that for about 50% of the people that call him (many of them third- or fourth-time customers), “I can’t do anything because the value just isn’t there,” he said. He finds this problem is especially acute in the condo market, where values have dropped off more steeply.

Lowered property values can also affect homeowners who want to pull out some cash as part of their new refinancing. Such loans are limited to 75% of the appraised value, which can nix the plans of would-be borrowers who don’t have enough equity this time around.

Some people are able to raise the cash to pay off enough of the existing loan to bring the balance down to the new value of their property. Sheets says one of his customers, a doctor who wants to refinance for a second time, recently brought in $45,000 in cash to bring down his loan to a refinancible level.

Is there a fourth wave swelling out there? Mortgage brokers are hesitant to predict one. But homeowner Glatstein notes, “When my parents bought their home in 1960 they got a 5% loan.”