Is the Time Right for Homeowners in Spring, Tomball, The Woodlands, or Houston to Refinance Their Mortgage?
Choosing to refinance your mortgage can be a very challenging task. While the prospect of a lower rate, lower monthly payment, or pulling equity out of your home to use for other purposes may sound attractive, there are a number of factors a homeowner should consider when deciding whether the time is right.
The following are five factors to consider when making this decision.
1. Low Interest Rates - The most obvious factor in whether to refinance is interest rates. If mortgage rates have decreased since your last loan was originated, or if fixed rates are relatively low and you are currently in an adjustable rate mortgage, refinancing might make sense. In the case of a conversion from an adjustable rate loan to a fixed rate loan, your interest rate savings may not need to be that significant if your primary objective is to remove the risk of rising interest rates from your future budget. In a low rate environment, you might have the opportunity to lower your monthly payment while keeping the term of your mortgage approximately the same. You may also consider refinancing the term of your mortgage to keep your payment consistent, but allowing you to pay off the loan sooner. With any of these options, your interest savings along over the term of your mortgage loan can easily amount to thousands of dollars.
2. Increased Equity in Your Home - Unlike many areas of the county, many residents of Spring, Tomball, The Woodlands, and Houston have experienced increases in the value of their home since it was purchased due to the strong local economy. Unfortunately, unlike your brokerage account, you cannot easily access this equity unless you sell your home. An alternative would be to pursue a "cash-out" refinance where you would refinance for a higher amount than your current loan balance. Since the interest rate on a first mortgage is likely lower than on credit card or other unsecured debt, and likely tax deductible, paying off other debt in a cash-out refinance can make good financial sense. In cases where you either increase the term of your loan or interest rates have fallen, this strategy may allow your monthly payment to remain the same, though you need to remember that financing additional principal inevitably means you will increase your overall mortgage debt. There's no free lunch!
3. You Are Still in the Early Years of Your Mortgage Loan - In the early years of your payment schedule, most of your payment is going towards principal; great for a tax deduction, but not so great for paying off your loan anytime soon! However, this is when it makes the most sense to refinance. When you are in the later stages of your loan, most of your payment goes towards principal, thus minimizing the impact of a reduced interest rate. Typically, if you are just seeking to reduce the rate on your loan, you will likely fare best if you refinance in the first ten years of a 30 year mortgage. Alternatively, if you are considering taking cash out of your home when your first mortgage balance is low, you may be better off taking out a home equity line of credit or a second mortgage.
4. You Plan to Remain in Your House - In order to maximize the value of refinancing, you need to remain in your home long enough for your interest savings to offset your closing costs. For example, if refinancing your mortgage will cost $3,000, and your monthly payment will be reduced by $200, you need only remain in your house for 15 months to break even. On the other hand, if your payment is only going down $75 per month, it will take you 40 months. While we all think we'll never move, evidence suggests we will. The average homeowner moves approximately every seven years, so you should keep this in mind when making your decision.
5. You Have a Large Mortgage Balance - While many experts might say it only makes sense to refinance if you can lower rate by 1.5-2 reduction in rate may not offset the closing costs on a $100,000 loan, it may make economic sense for a $400,000 loan. Once again, you must weigh the time to recoup the closing costs you will incur with your overall interest rate savings.
Your mortgage broker can assist in running through different scenarios with you to determining if refinancing makes sense, and which program and lender is best suited for your needs. You can also find various refinancing calculators on the web that can assist with your research.
Mike Lesmeister is a licensed Texas Mortgage Broker and Partner in Home Loan Specialists, Inc. http://www.hlstx.com , a Houston-based mortgage boutique catering to the needs of homeowners in Spring, Tomball, the Woodlands, and Houston, TX. He can be reached via e-mail at MikeL@hlstx.com
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