Article Treasure Cove

The recent rate environment has created a surge of interest in mortgage refinancing since the end of the year. The chance to significantly lower one’s monthly mortgage payment, fund home improvements at record low rates, or knock ten years off of a mortgage, are strong incentives to take action. The mortgage process is not without it’s challenges however, and borrowers in Houston, Spring, The Woodlands, and all over Texas, should be ready for the unique challenges they may face in this environment.

There are three major reasons to consider refinancing right now, and it all starts with rates. Mortgage rates are currently at or near record lows. A strong borrower can obtain a rate below 5% on a 30-year mortgage, and perhaps below 4.5% on a 15-year fixed rate loan. Freddie Mac has been tracking mortgage rates since 1971 and has never seen rates this low. A low mortgage rate allows a borrower to keep the same term and reduce their monthly payment, allowing them to save thousands in interest payments over the term of the loan, or reduce the term from say, 30-years to 15-years for a similar payment depending on if their current rate is high enough. Either way, the interest savings can be enormous.

The second reason to consider refinancing is to take cash-out in order to do home improvements or renovations. It makes alot of sense to use home equity to make improvements because mortgage interest is tax deductible and the right improvements can immediately add value to a home. A remodeled kitchen or bath have the greatest impact on a home’s value, while the costs of adding a swimming pool are rarely recouped. Rolling high interest rate debt from credit cards or other loans into your mortgage can be another great way to save money. Many borrowers are paying interest rates of 18% or more on credit card debt, while mortgage rates are far lower. This can create needed breathing room for borrowers swimming in credit card debt, and once again reduce overall interest expense. The important thing to remember here is that you are shifting debt from unsecured debt to mortgage debt. The implications of defaulting on your mortgage are far greater. In addition, you may be repaying the mortgage debt over a far longer period than you might pay the credit cards debt, and you must be disciplined to avoid using your cards again for discretionary purposes.

While it seems like a great idea to refinance at a lower rate, there are some caveats we should mention. First, qualifying for a mortgage is not as easy as it once was. During the days of of the sub-prime market, even marginal borrowers were able to obtain mortgage financing with little to no money down. Today, credit standards have tightened. Minimum credit scores of 620 or more are common and prime rates are reserved for borrowers with credit scores of 760. In addition, sufficient equity in your home is often required to facilitate a refinance. Borrowers in markets like South Florida, Southern California, Las Vegas, and Michigan have the biggest challenges since they have been hit most significantly with foreclosures and the resulting decline in property values. If a borrower put no money down, and property values have delcined, it will be difficult to find financing since you likely owe more than the home is worth. There are some programs that have been introduced recently by Fannie Mae and Freddie Mac, the two largest owners of residential mortgage debt in the country, that allow some homeowners with negative home equity to refinance, provided their loans are owned by these entities. You should consult a good local mortgage broker to see if you qualify for one of these streamlined programs.

Fortunately, Texas residents are in better shape. Property values around the state did not have the major appreciation fueled by speculation as did some other markets, and thus have not endured the same declines. According to the National Association of Realtors, home prices in Houston declined modestly (2.9%) over the past three years, while housing prices nationally dropped almost 20%. In addition, the economic environment in Texas has been stronger because of the state’s exposure to the energy sector and it’s pro-business tax policy. Thus, unemployment rates in Texas stand at 7%, far below the double-digit rates seen in California, Nevada, and Michigan.

One challenge faced by Texans is the cash-out refinancing limitation. Texas State Law permits a homeowner to do a cash-out refinance at up to 80% of the home’s market value, so unless you have accumulated alot of equity in your home, your ability to refinance for debt cnsolidation or home improvements may be limited. In addition, there are state regulated limitations on closing costs which may prohibit some lenders from making cash-out loans below $100-150,000. Rate and term refinances are not subject to these rules, so you can still benefit from the low rate environment under those scenarios.

In order to best prepare yourself for the refinance process, here are some useful tips:

1. Know your credit score before meeting with your lender – increasing your score by just 10-20 points can save you thousands of dollars in fees and perhaps make the difference in whether you even qualify to refinance.

2. Ask your lender about streamlined refinancing programs – these programs often have more flexible qualifying criteria and lower closing costs

3. Have your documents together – have your W-2’s, current pay stubs, bank statements, and mortgage statements ready as well as any documents from your last loan closing.

4. Act right away – many economists predict mortgage rates will rise before the end of the year, so don’t wait too long.

Record low mortgage rates provide homeowners with a unique opportunity to save money. Understanding the process and using it to your advantage will help insure you receive the greatest benefits.

Co-Owner of Home Loan Specialists, Inc. a Houston-based mortgage lender serving the communities of Spring, The Woodlands, Tomball, Conroe and Houston, Texas.

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