5 Tips for Deciding Whether to Refinance Your Mortgage: An Interview with Josh Hiller of Heritage Home Loans

Tell us a little bit about your company and the services you offer.

Heritage Mortgage is a family owned branch of Hancock Mortgage Partners, a Texas based (headquartered in Sugarland) mortgage bank. While there are additional states in which we do business, the core of our bank’s lending, and those of our branch, are in Texas. We offer conventional, FHA, VA, Tex-Vet, USDA, and Jumbo loans to provide financing for those buying a home or refinancing an existing build. Additionally, we offer construction financing.

What are the main reasons people choose to refinance their mortgage?

Most of the time a homeowner refinances to reduce their interest rate and monthly payment. We are currently coming off an unprecedented period of very low interest rates, and while they are still historically VERY low, we are unlikely to soon see the historical circumstances that, combined with the Federal Reserve’s Quantitative Easing program, brought rates down to the low rates seen May 2012-May 2013. After improvement in the market over the first six months of the year, rates are now the lowest they’ve been since June 2013, so if a homeowner missed or were unable to refinance before, now is probably the time to do it.

When the rate environment isn’t conducive to what I’ve described above, which we call a “rate and term” refinance, the most common reason why a homeowner will refinance is to take equity out of their house in the form of a cash-out or home-equity line of credit loan.

How much equity do you need before considering refinancing?

On a conventional loan, we can lend up to 95% of the value of a home. The vast majority of homeowners who’ve come to me for a refinance prefer to use equity to pay for any closing expenses, the cost of which might be represented by 2-5% of their equity (depending on the size of the loan). In Texas, most urban areas have seen appreciation of greater than 10% each of the past two years, so many refinance candidates should see an improved equity position once their home has been appraised.

For a cash-out or home equity loan, a homeowner will need greater than 20% equity plus any rolled in closing costs.

If a homeowner’s credit scores are low, will this affect their ability to refinance their mortgage?

Credit scores are the largest single factor we use to determine rate pricing, so low credit scores can be a barrier both in terms of minimum credit score requirements, as well as a pricing standpoint. The minimum credit score on a conventional loan, for most lenders, is going to be 620; additionally, anyone at or near that minimum score is going to be penalized heavily on the rate, making any refinance less attractive from a savings perspective.

If you’re considering a refinance but are concerned about your credit, contact your lender and request they pull credit. This is important for two reasons: one, because the formula used to determine mortgage credit scores is different from that used for consumer scores available directly from the bureaus, and two, because a good lender will help you create a strategy to improve your credit. Speaking for myself, I’m always willing to help coach a prospective borrower on techniques to improve their score and I don’t charge for it, either. We also subscribe to a service that will help predict score improvements based on reducing debt, so it answers the questions many borrowers have of how to prioritize any debt reduction payments.

Can someone refinance if they have a second mortgage?

They can, but it’s rare. Generally any lender in the 2nd lien position will need to approve any refinance of the first. I think in this market, in which there’s been so much appreciation over the past few years, it’s more likely that a homebuyer will find better savings by “baking in” that appreciation into a new first lien and paying off the 2nd, even if it results in a period of the homeowner paying for mortgage insurance (as a reminder, mortgage insurance is required on all conventional loans with less than 20% equity). First off, the very presence of the 2nd lien worsens the pricing we can offer on the first lien (it can be as much as .25% on the interest rate). Second, mortgage insurance rates have come down considerably since the market crashed in 2008, and I can usually find that the cost savings between a cheaper new first lien and the relatively cheaper MI more than offsets the sum cost of the interest from the previously higher first lien and the 2nd lien interest.

That may be a little confusing to a reader; the short version is that a good lender will look at alternate scenarios to find the best combination of loans to fit your needs with least amount of expense to you.

Are there any risks associated with refinancing a home?

The principal risk in a refinance is losing the value of any closing costs paid up-front because a homeowner sold before there was enough time for savings to accrue. Refinances generally use pretty easy to understand math. There are fixed costs in terms of lender fees and title company charges, and the savings comes in the form of reduced payments from a lower interest rate. Because the expenses are paid up-front, either from a borrower’s cash reserves or through equity in the property, there is a period of time in which the borrower is “upside down” on the cost of the refinance. When I create a refinance estimate for a borrower, I always articulate any savings in terms of a break-even date. For example, if the fixed costs involved in the refinance total $3500, and the borrower will save approximately $100 a month post-refinance, then the break-even period is in 35 months. So at a minimum, the borrower will need to stay in the house for three years in order to come out ahead.

Main Reasons You Should Refinance Your Mortgage

If interest rates have dropped since you signed for your mortgage, you’re paying an unnecessarily high amount on your monthly mortgage payments. Refinancing your mortgage can solve that, but that doesn’t mean it’s a smart move for every Texas homeowner. Consider these points before deciding whether to plunge into a new mortgage plan.

If You’re Refinancing From Adjustable to Fixed Rate

Consider how the mortgage rates are trending. Are they going up, or dropping? With an adjustable rate mortgage, it may rise to a rate that’s higher than a fixed-rate mortgage. In that scenario, it’s wise to consider refinancing to a fixed-rate loan. But again, consider how long you plan on staying in your home. If you’re staying put longer than seven years, it’s a smart move to refinance to a fixed-rate. If you plan on moving a few years down the road, it may be unwise to refinance out of your ARM.

If You’re Refinancing from Fixed to Adjustable Rate

If you’re signed to a 30-year fixed rate, ask yourself, “How long do I plan on staying in this home?” If the answer is anything other than “as long as possible,” or “forever,” it doesn’t make financial sense to pay a higher, 30-year interest rate on a home you won’t keep for that long. The higher monthly payments are an unnecessary money drain. Research your refinancing options for an ARM (Adjustable Rate Mortgage), as the lower rate will produce a lower monthly mortgage payment.

Changing the Length of Your Mortgage

Texas homeowners can change the length of their mortgage. For instance, if you have a 15-year mortgage, you can extend it to 30 years. The principal balance of your mortgage is spread out over a longer period of time, lowering your monthly payments. On the negative side, the interest is higher on longer-term mortgages, meaning you pay back more in the long term. On the flipside, those with 30-year mortgages who want to pad their long-term savings should consider shortening their term to 15-years. Your monthly payment is higher, but wind up paying much less in interest during the life of the loan, saving you thousands of dollars in the long run.

If You’re Refinancing to an Interest Only Loan

With an interest-only loan, the minimum amount you have to pay is the amount of interest for a certain period of time. You can off pay as much of the principal as you like. This provides the flexibility to pay less if circumstances force you to divert money elsewhere.

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What’s the best way for people to contact you and/or your company?

While the bank’s hours are 9-5, I’m almost always available by phone and check email frequently throughout the day (joshhiller@heritagehomeloans.com). I’m also happy to take calls after hours or on the weekends by mobile (512) 300-4813.