Historically low interest rates recently have sparked a mortgage refinance boom in Hawai'i that is helping homeowners and lenders during difficult economic times.

The national average interest on a 30-year fixed-rate mortgage last week dropped to 5.10 percent, with an average 0.7 point purchase cost, according to a survey by Freddie Mac, which said the rate hasn't been lower since the survey's inception in 1971.

Local rates last week averaged 4.95 percent and 1.5 points on a 30-year mortgage, and were down from roughly 6 percent as recently as November, according to a Honolulu Board of Realtors survey.

"Refinancing has just gone insane," said Mark James, vice president in the Honolulu office of California-based Mason-McDuffie Mortgage Corp.

The substantial drop in rates is welcome news for many homeowners trying to cut back spending amid a declining economy, and could help ease rising foreclosures as people struggling to keep their homes see an improved possibility to reduce monthly payments.

The refinance boom also is a blessing for banks, mortgage brokers and others in the real estate industry such as title companies and appraisers — a broad group of businesses that generally suffered the effects of the subprime lending implosion two years ago and the tighter lending standards implemented afterward.

Last year, home sales on O'ahu sank to a 10-year low, which further hammered many in the industry, and lower sales are also forecast for this year.

Behind the boost in refinancing are federal government incentives — namely the Federal Reserve cutting its benchmark interest rate to near zero on Dec. 16 — that have led lenders to lower mortgage rates.

Frank Nothaft, a vice president and chief economist with Freddie Mac, last week said in a report that the number of refinance applications for conventional mortgages jumped more than 500 percent between late October and late December.

Nothaft said rates have come down by about 1 1/3 percentage points since November, representing a mortgage payment savings of $173 a month on a $200,000 loan.

LENDERS OVERWHELMED

The opportunity to save money in strained economic times has produced a rush of refinance applications, and created backlogs for some lenders, which say it now takes about 45 days to close on refinancing instead of the typical 30 days.

That could even grow to 60 days if the refinance boom continues.

At Bank of Hawaii, mortgage volume soared by a factor of five last month, and was almost entirely driven by refinancing, said Lee Moriwaki, the bank's senior executive vice president of consumer lending and mortgage banking.

Moriwaki said the surge has bank employees working extra-long hours, and could lead to temporary staff hiring if the volume persists.

Stan Ishii, Honolulu branch manager at MetLife Home Loans, which has seen applications surge more than 500 percent in the past month, said he was working at the office with four other employees overnight on New Year's Eve, and didn't leave until close to 3 a.m. on New Year's Day.

"It's crazy," he said. "I told the group, if you're not working 10-hour days you just don't care.' It's unprecedented ... and who knows how long it will last."

It's impossible to know how long mortgage rates will stay near historic lows, or if they might move lower, but some lending officials expect the federal government's plan to begin buying up to $500 billion in mortgage-backed securities this month will keep rates low for a while.

Tom Zimmerman, president of Central Pacific HomeLoans, said he expects refinancing business to keep building as more people realize how low interest rates have fallen.

"I don't think the word has gotten out," he said.

The last notable dip in mortgage rates that created a significant surge in refinancing was in 2003, when local rate averages hovered at or just below 5 percent in May and June. So the present market presents an opportunity for anyone who missed out on the prior mortgage rate trough.

Besides the 30-year rate, the national 15-year fixed-rate mortgage last week was below 5 percent, at 4.83 percent with an average 0.7 point purchase cost, which Freddie Mac said was the lowest rate since the 4.70 percent of March 25, 2004.

The average 15-year rate from local lenders last week was 4.87 percent with 1.6 points.

NO EQUITY, NO LOAN

Many homeowners are replacing existing mortgages with new loans carrying more favorable terms, to reduce their monthly payments, shorten the life of their loan or convert from an adjustable rate to a fixed rate.

However, not everyone is in a good position to take advantage of low interest rates, because of the soft real estate market.

James at Mason-McDuffie Mortgage said many people who bought their homes in the past few years won't be able to refinance if they don't have home equity.

"If they don't have equity in their property, they have a problem," he said. "We've got a lot of people who are stuck. They can't refinance."

Generally, people who used zero-down loans to buy homes that haven't appreciated since their purchase won't be able to refinance.

Median prices on O'ahu last year were down 3 percent for single-family homes, and unchanged for condominiums compared with the prior year.

James said that typically 5 percent equity in a home is required to refinance.

Another potential challenge for those seeking to refinance is job security. Zimmerman said lenders will check with employers about the likelihood of an applicant's continued employment, which has become increasingly unstable at companies contemplating layoffs.

An applicant's credit score also is a factor. Generally, a FICO score of 660 is enough to qualify for a conventional mortgage up to $625,500 at the best rate. Lower scores can still qualify an applicant for refinancing at slightly higher interest rates.

A rule of thumb used to be that the new interest rate has to be 2 percentage points lower for refinancing to make economic sense for a borrower. But lenders say a difference of 1 percentage point, or even 0.75 percentage point, can benefit a homeowner, especially on larger loans.

Besides the interest rate, advisers say homeowners should consider factors such as how long they intend to own the home and the cost of the loan.

Extending the life of a loan by refinancing could make a new loan costlier in the long run. Loan costs can include closing costs, points (a percentage of the loan value) and mortgage insurance, which are expenses that take time to recoup.