To refinance, or not to refinance – that is the question. There are a number of reasons why someone should consider refinancing and many of them serve a purpose beyond just lowering your interest rate.
Types Of Mortgage Refinances
Rate and Term Refinances
If you’re looking to refinance for the sole purpose of lowering your interest rate, changing your loan term, and/or reducing your monthly payment then your home loan will typically fall under the Rate and Term category. Check out our Refinance Mortgage Calculator.
Lower the interest rate
Lower the monthly payment
Change the term of the loan (ex: go from a 30 year to a 15 year)
Reasons For Refinancing Your Mortgage
Pay off interim from construction
Get rid of a second lien
Get rid of balloon payment
Finance home improvements and do some remodeling
Switch from an ARM to fixed rate, or vice versa
Get rid of MI
Remove someone from a loan / Owelty
Paid cash for a home and want your money back (i.e. delayed financing)
Types of Cash Out Home Loans
Texas Home Equity A6 Cash Out Refinance
Agency Cash Outs – Agency Cash Outs are when you refinance an existing first and second lien BUT that second lien is a non-purchase second (i.e. that second lien was not originally used to buy the home). Example: Someone buys a home with a $300,000 loan, then a year later they decide to get a $30,000 home imprvoement second lien to put in a pool. Finally, let’s assume two years after the pool the rates drop and they want to refinance and combine both loans into a single mortgage. The new single mortgage is considered an “Agency Cash Out”. This is different than a Texas A6 cash out.
Pay off debts
Pay for school tuition
Build up asset reserves
Purchase another home
Myths: It’s not worth it if it’s not .5% or more?
No Costs vs. Nothing Due
There’s a difference between a no cost loan and a “nothing due” at closing. No costs means there aren’t any costs for this loan – i.e. no fees are paid at closing and no costs are rolled into the loan. <<< watch for stuff getting rolled into the loan. >>>>
When NOT to Refinance
In fact, there are cases where someone should NOT refinance even if they can lower their rate. The loan amount is so small that a big reduction in rate doesn’t equate to big enough savings. The reason is because of the fixed costs of a loan – a $40,000 loan has most of the same costs as a $400,000.
Texas Home Equity Loans
12-Day Letter for Texas Home Equity Loans – when taking cash out of your home in Texas, or when refinancing an existing A6 loan, there are certain rules to follow. Be sure you know these rules before starting the process.
Cash Out Loans
Texas Cash Out home loans are unique because Texas is the only state that has it’s own (more restrictive) laws for equity loans. The technical term is a “Texas A6”; the article of the Texas Constitution that outlines the parameters.
Texas A6 equity loans can be done a “normal” first liens or as a second liens. Interest rates for cash out loans in Texas typically have .125% to .25% higher interest rate than a “normal” rate and term refinance.
There an only be one A6 loan on a home.
Texas A6 Cash Out
As mentioned a Texas A6 cash out home loan is unique and has it’s own set of guidelines. The most prevalent is that LTV is limited to 80% of the home’s value. Another nuance is that an A6 can’t be refinanced for one year after closing.
There is a 3% cap on closing costs which creates challenges on smaller loan amounts. Example: if there are $3,000 of fixed costs in a loan PLUS a title policy, and someone wants a $100,000 cash out loan amount, the lender will either have to “eat” the title policy (which could be $800-$900) and therefore increase the interest rate to the consumer to recoup those costs.
See all the guidelines on the Texas 12-day Letter.
A Home Equity Line of Credit (HELOC) is typically done by banks and they are second liens with variable rates (ex: Prime + .5% up to 2%). The costs are typically $500 + Appraisal ($500). 20 year loan term but the first 10 years are interest only payments with the line only available for the first 10 years, this is good option for money that’s needed for the short-term (i.e. few years). This is also a great financial safety net because a zero balance means zero payment so it’s a handy lifeline when needed. FYI, HELOCs are limited to 50% of the homes value and very few banks will go above $150-200k. There are a few banks that will offer up to $500k. Call your favorite lender with a Financial Advisers Mortgage Cheat Sheet to discuss.
Second Lien Cash Out (A6)
A second lien cash out home loans are done by banks. Like HELOC the costs are minimal, but unlike HELOCs these are fixed rate mortgages. The rates can be 1.5% to 3.5% points higher than a “normal” first lien mortgage depending on credit and amortization schedule. Most banks will offer terms in five year increments starting at 5 years and going up to 20 years. In rare cases some banks will offer 30 year fixed.