Ocala Star Banner
December 29, 2008
Ready to finance? Think twice.
By: Fred Hiers
James Logue watched as interest rates fell to record lows and wanted to hop on the bandwagon to see if he could refinance his home. Doing some quick math, the On Top of the World retired engineer was hoping to knock off a few hundred dollars from his monthly house payments. The interest rate on his $190,000 home that he bought a few years ago was 6.75 percent.
But when the Federal Reserve announced two weeks ago it was buying up to $600 billion of debt issued or backed by the four lenders – Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan – mortgage rates fell like a rock. Additional Fed cuts now have interest rates at about 5.25 percent or less.
Logue wanted a piece of that financial action. “So I called the bank and told them I wanted to refinance,” Logue said. “But then they told me what it would cost.” What Logue’s bank wanted in fees and administrative costs was about $7,000. Logue did the math again and decided against the change. Instead, the 76-year-old Logue complained that the only thing his bank was interested in offering him when it came to his mortgage was that he double up his payments, making two each month instead of one.
“They weren’t interested in lowering my interest rates .●.●. and then they wanted $7,000 to do it,” he said. Logue is just one among thousands of property owners looking to take advantage of lowering interest rates, but often finding it is more costly and complicated than expected.
The Mortgage Bankers Association, an industry trade organization, reported this month that its index of refinance applications tripled. It’s the largest hike since 1990, when the association began tracking the numbers. But how many of those applying to refinance will be approved is unknown.
JP Morgan Chase spokesman Tom Kelly said refinancing is like starting from scratch for getting a new loan. JP Morgan Chase holds or manages 10 million loans for Washington Mutual Bank, EMC and Chase. Kelly said people owing a bank money fall into two categories: those able to pay their debt and those facing foreclosure.
For those able to make their payments, banks have the choice of trying to get the property owner to stick with their higher interest rate or working with them to lower it. If the bank convinces the home or business owner to stay with their interest rates, that means more money for the bank. But the bank also wants to keep its customers, so it’s also in the best interest of the bank to accommodate its clients and see if lowering interest rates is feasible, Kelly said.
And the requirements for a lower interest rate will likely be more stringent than when the property owner got their original loan, he said. To be refinanced, Kelly said the property in question will have to be appraised again, the bank will likely want bank statements, tax returns and pay stubs to help it consider whether it will renegotiate the loan.
“And your home may not be what it used to be (in value),” Kelly said. “We’re making our decision on today’s facts, not what the facts used to be.” The cost to refinance, depending on the circumstances of the loan, “could easily be a few thousand dollars.”
Navroz Saju, and his brother Azim, learned recently not all banks are interested in refinancing a loan. The Ocala brothers, their family and business partners, own six hotels in North Central Florida, including three in Ocala. The hotel company is trying to reduce its interest rate with its Ocala bank for its Holiday Inn Express and Suites next to the Silver Springs theme park.
Navroz Saju said he and his brother cut the hotel’s expenses as much as they could but, “We do have a little bit of a negative cash-flow because of the economy.” The pair contacted their other banks and refinanced their loans, but were ignored when it came to their financial institution in Ocala.
“I thought they would be cooperative. I was current in my payments,” Navroz Saju told the Star-Banner. “I was shocked. It didn’t make sense to me. So I went back to making cuts,” he said about his bank’s unwillingness to work out a new payment plan. “I told them they could analyze our financials with a microscope. But it didn’t matter.”
“Our objective wasn’t to make a profit (with the lower interest rates), just get through this period,” Navroz Saju said.
Navroz Saju and his brother wrote the bank saying the economy was taking its toll on their business and they needed the bank’s help.
“As you are aware, a lot has changed in our economy since we closed on this loan,” they wrote. “The unanimous consensus is that this is the worst economy since the Great Depression. “The hospitality industry in the Marion County area is down over 25% across the board,” they said.
The brothers later told the Star-Banner that their bank finally agreed to meet with them about refinancing, but the experience was an eye-opener. So was the amount of paperwork required to refinance, Navroz Saju said.
“The paperwork is overwhelming,” Navroz Saju said. “If you’re a smaller business or a homeowner or a mom-and-pop, it’s very tough. Luckily we have an in-house CPA (certified public accountant),” he said. “It’s a lot of work.”
But Kelly said people thinking about refinancing should do some basic math before taking the plunge, namely calculating the cost associated with refinancing and compare it to how much they would save in their payments. Kelly’s bank has seen a doubling of mortgage application requests, many of which were to refinance. That doubling was before the Fed cut its benchmark interest rate to zero. After the rate cut, applications jumped another 25 percent for the bank and is expected to continue climbing.
The average rates for a 30-year, fixed-rate mortgage is about 5.2 percent now, giving growing numbers of borrowers incentive to refinance to bring down their mortgage costs. But it’s not an open door for everyone to refinance, Kelly said.
Falling interest rates aren’t going to necessarily allow people facing bankruptcy or people unable to afford their homes to refinance their debts. Getting or refinancing a mortgage will likely be harder now than it used to be, he said. And there is no one answer as to who can get the bank to refinance their loan.
“Our goal is to keep you as a customer in the long run,” Kelly said, “if you qualify.”