Updated: Feb 25, 2020
I have always been concerned about reserved housing. There are a lot of detailed rules and I think the average homeowner does not fully understand. I do acknowledge that reserved housing is an option to help people become homeowners. However, I often caution my clients about the potential long term risks.
During a recent conversation with Shane Irish of Loan Depot, we discovered that the Hawaii Community Development Authority (HCDA) has some strict guidelines about refinancing for reserved housing owners who put down less than 20%. This caught us off guard because preventing one from refinancing to a lower mortgage is actually a good thing.
Shane and I spoke with HCDA; the person who talked to us provided us with a lot of insightful information. In analyzing the refinancing guidelines for reserved housing owners who put down less than 20%, one can only refinance up to 80% of the original sales price. The following example was provided by Shane:
"A client bought his reserved housing unit for $438,746 with 10% down for a purchase loan amount of $350,997. As part of the purchase, the property was appraised for $613,000. At the time of the closing, the owner locked in a mortgage rate of 4.375%. Since closing, the owner wanted to refinance at 3.375%. By refinancing, this would drop the client's principal and interest fixed payment from $1,971.53 to $1,790.49 ($405k loan amount at 3.375%). Yes, the owner increased his loan amount which cuts in to the HCDA’s available equity -- the thing HCDA is trying to protect. I understand that this could make HCDA nervous because there are numerous reserved housing units. However, the owner's new loan balance of $405,000 is still 66% of the appraised value, leaving 33% or $202,290 of equity. This refinance structure is not allowed because the new loan balance of $405,000 exceeds 80% of the original sales price.
The owner’s original mortgage balance of $394,871 at 4.375% will pay out $314,880.77 in interest over the course of the 30 year mortgage. Not only will a lower rate drop the monthly payment, but a new mortgage with a balance of $405,000 at 3.375% pays out $239,576.27 in interest. That is a difference of $75,304.50 over the course of the 30 year mortgage term. Why are we preventing these homeowners this opportunity?"
Since rates are still relatively low, I have reached out to my clients to see if they are interested in refinancing. If refinancing is the right thing for the client, it makes sense to lower one's monthly payment. Many of my clients are first time home buyers; saving $100 - $200 a month can go a long way.
Shane and I will continue to research this topic. Please let us know if you have any questions.