Time to Refinance in Fredericksburg, TX?
The Federal Reserve’s decision to buy up mortgaged-backed securities caused mortgage rates to fall and created new opportunities. Should you refinance your mortgage now? Before you rush to refi, take a few minutes to determine if it’s the right move for you.
When does it make sense to refinance my Fredericksburg, TX Property?
Refinancing involves starting over and applying for a new loan. Whether homeowners deal with the original lender or a new one, the new loan will pay off the old loan and the borrower then makes payments according to new loan terms.
Good reasons to refinance include getting a lower interest rate, shortening the term of the mortgage to build equity faster, lowering monthly payments or switching from an adjustable rate to a fixed-rate mortgage.
Even if you just secured a new mortgage recently, it might make sense to refinance. Homeowners should consider refinancing if, in the long run, it will save them money.
First you have to find out the cost of getting the new loan. Refinancing can cost around 2 percent to 3 percent of the total loan amount.
To determine if it will save you money, calculate your break-even point. You can calculate it by dividing the mortgage fees by the monthly savings. The answer you get tells you how many months it will take for you to break even.
If you plan on retiring in the house, strongly consider refinancing. If you plan to sell within two and a half years, it may be unwise to refinance as the payback of the cost to refinance may not be recovered.
How do you figure your monthly savings? You’ll have to get an estimate of the rate for which you’ll qualify. A mortgage broker or loan officer can tell you that. Ask your Fredericksburg loan officer, or consult a mortgage calculator to determine what your principal and interest payment would be with the new loan. Don’t compare that with your current mortgage payment, which likely includes a pro rata share of your property tax and insurance payments. Your payment coupon should show an itemization of your current monthly principal and interest payments. Now you can figure out how much you would save every month.
Find out if your current loan has a prepayment penalty. If it does, determine what the penalty would be if you refinance, and add that amount to your closing costs to determine your new break-even point. It might make sense to hold off on refinancing until you’re clear of the prepayment penalty period.
What if you owe more than your house is worth?
For homeowners upside down on their mortgages, refinancing probably won’t be in the cards. Try to look at it from the lender’s viewpoint.
Let’s say you bought your home for $300,000 at the market top, but recent sales indicate your home is worth just $225,000. A neutral third-party appraiser confirms this. You owe $280,000. How can you expect the lender to give you a loan for $280,000 at more favorable terms?
The fact is, you’ll likely have to pony up the difference between what you owe and what the refinancing bank is willing to lend you. If you have the cash and you expect to stay in the home for many years, then it may be worth taking this step. Eventually, Fredericksburg, TX property values will rise again, but it will take time.
The worst thing you can do is walk away from the home altogether. If you’re considering foreclosure, consult an attorney. Try to avoid foreclosure if at all possible.
What if you’re not “ordinary”?
If you’re self-employed, the process is a bit trickier. Fewer lenders want to deal with unconventional financial situations, but if you have a high credit score and a large down payment plus proof of your income, it’s possible to find a deal.
Homeowners who have second mortgages may also run into some difficulties. Before you can refinance the first mortgage, the holder of the second mortgage must agree to subordinate the second mortgage to the new first mortgage. If that lender refuses, the homeowner must then qualify for a new first mortgage that will pay off the second.
In these cases, it’s best to go to a mortgage broker rather than directly to a bank, because a broker has access to a variety of lenders that offer different loan products.
What steps do you need to take?
The fact is, you need two stellar assets these days before you can refinance: an excellent credit score and enough equity in your home. If you have at least 10 percent equity in your home — ideally 20 percent or more — or some spare cash to fill in the difference between the amount owed and the amount you can borrow, start the process by checking your current mortgage note to be sure there’s no prepayment penalty.
Next, get a copy of your credit report and check your credit. These days most lenders are requiring good credit scores, though some programs exist to help out borrowers with mediocre scores. The problem is that those borrowers likely will have to pay a surcharge or higher interest rates. Under these circumstances, you need to decide if it makes sense to refinance.
Besides abundant equity and a good credit score, lenders will also want you to be able to document your employment, income and assets. Lenders have abandoned the practice of offering loans without verifying this information. If you meet all of those requirements, it’s time to start shopping for a loan. You can chose to either work with your current lender or find a new one.
Be aware that sticking with the original lender may be easier and less expensive. The lender may not need a new property appraisal, a title search or other items that would normally be required on a new loan. That lender should also be willing to offer a better price because it’s easier and more cost-effective to keep a good customer than it is to spend marketing dollars finding a new one.
That said, it never hurts to check out the competition. Start shopping by comparing the rates of local Fredericksburg, TX lenders.
If you do decide to shop around, make sure that you do all your shopping within a 30-day time frame so as not to ding your credit score with too many inquiries.
Thanks to the plan from the Federal Reserve to buy up mortgage-backed securities, rates are lower and the refinance business is booming again. For Fredericksburg homeowners who qualify, now may be the time to trade in that old mortgage for a better one.
