Refinancing is not necessary for every homeowner with a mortgage, but many homeowners can benefit from reduced interest rates if they refinance at the right time. The best time to refinance is when you can get a significant financial benefit from it without sacrificing something important to you.
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There are visible signs you can look for to help you determine the right timing. Read on to learn how you can spot the signs for yourself and make an informed decision on refinancing your home in Texas.
Contact a District Lending refinance specialist for an expert opinion on your specific situation. Our team can help you determine if refinancing is the right option for you.
Financial Signs It’s Time to Refinance
The best way to determine when you should refinance your mortgage is by looking at the financial benefits. Refinancing at the right time can significantly reduce the cost of your mortgage or allow you to access much-needed capital.
Look at things like reduced market interest rates, better individual loan terms, or higher equity ownership.
Interest Rates Have Dropped Significantly
Refinancing can be worth it if you’re able to reduce your mortgage rate by at least 1%. If you still have a high loan balance and a high interest rate, you can benefit from a drop of at least 0.5%.
Rates need to be low enough to make a difference without costing you more in closing costs, like an appraisal fee or a loan origination fee.
When you’re comparing your current rate to what’s available now, compare your rates with the loan type you want. If you want to refinance into a 15-year or 30-year fixed-rate loan, check out the rates available on those loans specifically for the most realistic estimates.
Your Credit Score Has Improved
If you obtained your mortgage when your credit score was lower, refinancing can help you lower your mortgage interest rate. To be eligible for refinance in Texas, you need to have a score of at least 620.
As long as your score has increased by at least 40-50 points, you can try to refinance and negotiate for a new loan with a lower monthly payment. Your current lender may not offer a different rate, but a different lender may give you a more competitive offer.
Your Home Equity Has Increased
The more equity you own in your home, the more access you have to better mortgage rates or liquid capital through cash-out refinancing. What you can do will be dependent on your loan-to-value ratio (LTV).
Mortgage lenders rely on measures like LTV to determine how much you can borrow in a traditional refinance or a cash-out refinance. LTV ratios refer to the amount being borrowed divided by the value of the home, expressed as a percentage. A high LTV represents more risk for the lender.
With mortgage refinancing, LTV is calculated using the current value of the home and the remaining loan amount. If you’ve paid down your original mortgage or the value of your home has increased, your LTV will be lower. This may allow you to access equity from your home through a cash-out refinance.
Cash-out refinance loans replace your original mortgage by taking additional cash out in exchange for a share of your home equity.
Refinancing to Change Your Loan Terms
Refinancing can also be used to adjust the terms of your current loan. This can be accomplished by switching the mortgage type, changing the loan terms, or eliminating mortgage insurance payments.
Switching from an Adjustable-Rate Mortgage (ARM) to a Fixed-Rate Mortgage (FRM)
Mortgage refinance can be used to switch from an unfavorable adjustable-rate mortgage (ARM) to a more predictable fixed-rate mortgage (FRM). The interest rate for an ARM fluctuates based on market rates, exposing you to higher risks when the market faces change.
If your credit score has increased or you own at least 20% equity in your home, a cash out refinance loan may allow you to lock in a lower interest rate on a fixed-rate mortgage. You can save money and enjoy a predictable monthly payment on the new loan.
Shortening Your Loan Term
Refinancing a loan can shorten your repayment period in two ways:
- Reducing interest rates: If you meet the right criteria, both conventional and cash-out refinance can lead to a lower interest rate on your loan. Lowering interest rates shortens the loan’s lifetime because you pay off the principal faster.
- Changing the base mortgage term: You can change your current mortgage term during a refinance. Shortening the loan term may help reduce interest rates.
Paying off your mortgage faster reduces the amount you’re spending on interest over the lifetime of the loan.
Removing Private Mortgage Insurance (PMI)
Monthly mortgage payments often include private mortgage insurance (PMI) if your initial down payment was less than 20% of the home’s value. If you’ve reached 20% equity ownership in your home, you may be able to remove PMI payments from your loan by refinancing, resulting in lower monthly payments.
Note: FHA and VA loans may have different requirements for mortgage insurance premiums. Check with your loan servicer to check the specific terms of your loan.
Other Considerations Before Refinancing Existing Mortgage
Refinancing involves more than just interest rates and loan terms. Here are some other factors you should consider before refinancing your mortgage:
- Closing costs & loan fees: Refinancing includes the same costs as a conventional loan. Consider how closing costs, loan processing fees, and other one-time costs will affect your finances.
- Taxes: With a cash out refinance, interest paid on your cash equity balance is only tax deductible if it’s used to buy, build, or substantially improve your home.
- Your home plans: If you plan to move within the next five years, refinancing may not be worth it. The cost of refinancing tends to pay off only if you continue to hold the loan for at least five years.
Weigh all the costs involved in refinancing to get the full picture of how it will impact you, especially in the short term.
Refinancing Programs and Options in Texas
Beyond a conventional refinance or cash out refinance, some Texas residents can access these refinance programs:
- Freddie Mac Enhanced Relief Refinance
- Fannie Mae HIRO Program
- VA, USDA, and FHA Streamline Loan Refinancing
- Home equity loans
- Home equity lines of credit (HELOCs)
Home equity loans and HELOCs are available to a wide group of homeowners. A home equity loan is a secondary loan on your home equity, separate from your mortgage. HELOCs give homeowners the option to borrow cash against their equity up to a certain amount. A HELOC is also a second mortgage.
The Refinancing Process in Texas
Refinancing your mortgage in Texas involves these steps:
- Choosing a lender: Lenders will offer different interest rates, fees, and conditions for your loan. Look for a lender that offers the best balance for you.
- Pre-qualification: A lender’s pre-qualification gives you an idea of what kind of refinancing you’ll be able to obtain. To apply, you need to submit financial documents requested by the lender. This will help give them an idea of your financial circumstances, including your debt-to-income ratio.
- Completing the application: If you choose to go through with refinancing, you will complete a full application and provide any additional information not included in the pre-qualification process. If your home has not been recently appraised, the lender will likely require an appraisal.
- Closing: If you’re satisfied with the terms of the refinance, you can proceed with closing to finalize the deal. Any upfront fees or payments will need to be made at this time.
While the timing of each step may vary, every lender should follow this general process when refinancing your mortgage loan, regardless of what kind of refinance you’re doing.
When to Refinance Texas: Conclusion
Refinancing your mortgage can help reduce the cost of your loan, lower your monthly payments, or give you access to cash from your home equity. Check out your options today with District Lenders!
We can help you find the right refinancing option for your home, secure a competitive interest rate, and establish your new loan on your terms. Call (800) 460-6481 to speak to one of our agents today, or click here to get a free, no-obligation quote in minutes.