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

By Josh Hiller

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.

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.

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