During the past few months, rates have headed downward to the lowest levels of the past few years. It is no coincidence that we have seen a significant increase in the pace of refinancing at mortgage lenders across the nation. Let us take a look at some of the reasons that may influence a Texas homeowner to decide to refinance their present Texas mortgage:
- To achieve a lower interest rate and payment. Reducing one’s payment is the clearest value one can achieve. We simply compare our lower payment to the cost of refinancing. The cost may include fees associated with the refinance or may involve increasing the term of the mortgage.
- To take equity out of the home. Many who have built equity in their homes may use this equity to produce cash via a refinance. The homeowner may also achieve the same purpose with a HELOC, or home equity line of credit, added to their present mortgage.
- To reduce the term of their mortgage. Many utilize the lower interest rate environment to reduce their mortgage term rather than their payment. If the mortgage is shortened and the payment stays the same, the result will be significant interest savings for the homeowner.
- To move from an adjustable rate to a fixed rate. Many purchasers opt for adjustable rate mortgages during times of high interest rates, intending to refinance into fixed rates after rates drop. Others are forced to purchase with an adjustable because they do not qualify for a fixed rate mortgage or cannot afford the payment of a fixed rate in the short run. It should be noted that those with fixed rates may opt to refinance into an adjustable to achieve the payment savings necessary to make a refinance cost-effective.
- To move from a balloon mortgage to a fixed rate. Many consumers have opted for five or seven year balloon mortgages to save money when they purchased their homes. Most of these mortgages have a conditional right of refinance to a fixed rate instrument at the time the balloon payment comes due. The homeowner may opt to switch to a fixed rate via a refinance because there is a chance that rates could head upward before the due date arrives.
As you can see, the reasons for refinances can be quite complex. Many refinance transactions may involve two or more of the motivations we have discussed. For example, it is easy to see why a cash-out (pulling equity from the home) refinance would make more sense when a homeowner’s overall payment is decreasing because of a lower interest rate.
It is sometimes difficult for a lender to advise the homeowner as to whether a refinance makes sense because they cannot ascertain the following:
- What mortgage rates will do in the future. As much as most consumers would like lenders to be seers, no one can predict the future.
- What merit the consumer places upon values such as security, safety or permanence. Is having the home paid off ten years early a major benefit? Is having the security of $10,000 to fund the start of a retirement fund a significant con-sideration in their financial plan?
- How long the homeowner will be in the home or, more importantly, possess the mortgage. The homeowner does not necessarily pay off the mortgage when he/she moves from the property. The homeowner can also keep the mortgage when they move by renting the property or using it as a vacation home. Predicting future move-ments can be as risky as predicting future rates.
Predicting the future value of a refinance will never be an exact science—but it helps to have a good understanding of the issues involved and a good Texas loan officer can help guide you in making a decision and throughout the process...
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