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Houston Mortgage Company
Why Refinance Your Home?
Rate and Term Refinance Mortgage:
With rates at 45 year lows, the most
common reason to refinance is to lower
your interest rate. You might combine
this with a shorter term and get the
best of both worlds, a lower rate,
quicker payoff, all with a payment
that’s equal to or less than your
present payment.
When is the rate low enough to justify
refinancing? Since refinancing involves
paying closing costs, how much and how
long do you need to save with your lower
payment to pay back closing costs? How
much longer do you intend to live in the
home? A rule of thumb has developed
that says you should consider
refinancing if you can improve your rate
by at least 2%. Why? If your rate
improves by 2%, you will pay your
closing expenses back in two years or
less which has become the accepted
industry standard. This may or may not
be right for you as you can see from the
refinance scenarios shown below.
Cash Out Equity Refinance Mortgage:
Texas law allows a homeowner to borrow
up to 80% of the appraised value of
their home. Once you deduct the
outstanding balance of existing liens
and closing costs, the remainder is your
net cash proceeds.
Moving to Cambridge
Obtaining a refinance mortgage isn’t
without costs. If you can find your old
closing statement from the purchase of
your home, pull it out. You’ll see a
buyer and seller column of costs. So
what are your costs? The short answer
is both columns from the old closing
statement. There are some exceptions.
If the previous survey is less than 10
years old, the title company and lender
may let you use it again provided you
certify no improvements have been made
that would alter the survey. If your
current mortgage is no more than 7 years
old, you will receive a discount on the
new title policy. What about the
pre-paid escrow expense you had when you
purchased? Your refinance lender may
have to set up an escrow account as
well. This means that you’ll be
required to pay property taxes and
homeowner insurance when you close the
new loan. How much depends upon your
lender and what month of the year you
close the new loan. Don’t forget that
you will receive a refund of your escrow
balances from your previous lender but
this may take a few weeks to reach you
after you close your refinance
mortgage. As you did when you purchased
your home, it’s important to compare
interests rates and closing costs of
each lender before selecting one for a
refinance mortgage. (You can avoid
paying closing costs and pre-paid
expenses out of pocket.)
No Cost Refinance
Conventional Loan – All or a portion of
closing costs and pre-paid items may be
added to the new loan provided the new
loan (or loans if you have a 1st
and a 2nd lien) does not
exceed 95% of the appraised
value.
FHA Loan –
All or a portion of closing costs and
pre-paid items may be added to the new
loan amount provided the new loan amount
does not exceed 97.75% of
appraised
value.
VA Loan – All or a portion of closing
costs and prepaid items may be added to
the new loan amount provided the new
loan does not exceed the appraised
value.
Lender Paid Costs – Your mortgage
company may assist you by absorbing some
of your closing costs with a higher
interest rate but one still lower than
your present rate.
Refinance Scenarios
You want to improve your interest
rate and eliminate PMI from your monthly
payment.
Homes in the past few years have
appreciated to the point where your
current loan balance may only be 80% of
market value. If that is the case, you
should contact your lender to see what
proof they require to drop the monthly
PMI payment. You can accomplish this
without refinancing but if today’s rates
are attractive you can improve your
mortgage rate and/or term as well as
eliminate the PMI payment as part of the
appraisal process for your refinance
loan. Even if a current appraisal does
not indicate you have a 20% or greater
equity in the property, you can still
eliminate the PMI payment when you
refinance by including a second lien in
an amount necessary to bring the 1st
lien refinance mortgage down to 80% of
value. If this were done, you would
eliminate the PMI, have a lower interest
rate on your 1st lien and a 2nd
lien payment which when totaled will
generally be less that a higher 1st
lien loan amount with monthly PMI. The
second lien interest is tax deductible
where a PMI payment is not and you are
building equity faster because the 2nd
lien is normally based on a 15 year
amortization.
You want to
improve your interest rate and eliminate
FHA MIP from your monthly payment.
For all FHA loans closed before
January 1, 2001, the monthly MIP
(Mortgage Insurance Premium) will run
the life of the loan no matter what your
ratio is between present value and
current loan balance. If closed on or
after January 1, 2001, the monthly MIP
will drop when you reach a 78% loan to
value based upon the original value when
you purchased the property. FHA does
not allow you to order a new appraisal
(unlike conventional loans) to prove the
new loan to value (even if home values
have increased significantly). Remember
that the FHA monthly Mortgage Insurance
Premium is equal to ½ %. That’s like
adding a ½% on top of the interest rate
you currently pay and MIP is not tax
deductible. If you have at least a 5%
equity in your home, you may want to
refinance using a conventional loan and
a 2nd lien to eliminate PMI
when you refinance.
You want to improve your interest
rate and pay your escrows separately
from your mortgage payment.
If the 1st lien on a
conventional loan is only 80% or less of
the value, you can waive your escrow
payments and pay them separately. If
your monthly escrows are significant,
this might benefit you by keeping them
in an investment earning income until
your tax and insurance bills come due
every 12 months. Remember, when you
refinance, you can use a 1st
lien and 2nd lien combination
to keep the 1st lien at 80%
of value and have the option to waive
escrows.
You want to consolidate a first and
second lien or home improvement loan
into one lower interest rate.
You presently have a 1st lien
and a 2nd lien or home
improvement loan. When considered
together, you might substantially reduce
your total payment by combining the two
loans.
Your credit score has improved and you
want to reduce your rate.
Credit scores improve over time if you
have maintained your credit history
since a previous bankruptcy or
foreclosure. They may have reached the
point where you could refinance with a
market rate of interest. Even if you
scores have not improved significantly,
a new sub-prime interest rate might be
much better than your current rate.
You want to switch from an adjustable
rate to the security of a fixed interest
rate.
With fixed rates at 45 year lows, you
may want to consider the security of
refinancing out of an adjustable rate
loan and into a fixed rate. True,
adjustable rate loans are less than the
fixed interest rates but what is the
likelihood of them going down further as
they adjust over the life of the loan.
The probability say rates will go up
from here
You wish to obtain cash out of the
equity of your home.
Texas laws permit a homeowner to borrow
up to 80% of the appraised value of
their home. You now have a tax
deductible loan source to pay for
college tuition, large purchase, home
improvements, other investments, or
payoff debts, collection accounts, or
judgments. The interest rate on your
new loan may be less than your present
rate which increases the benefits of the
cash out refinance mortgage.
Buy out the equity of a joint owner
of the property.
You’ve had the misfortune of a divorce
and the decree states you owe a portion
of the equity on your home to an
ex-spouse. Why not buy out their
interest with a refinance mortgage?
As you can see from these scenarios, the
two percent rule mentioned earlier does
not always apply. Your motivation to
refinance may be a combination of
reasons. I'm sure you might think of
scenarios not mentioned here. For help
in deciding what’s best for you and the
math involved in refinancing contact us
for more information.
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