Residents of Texas, and particularly our local markets of Spring, Tomball, Conroe, The Woodlands and Houston, have been largely spared the pain of the national housing decline. There is good news and bad news associated with this stable housing market when it comes to refinancing your mortgage to a low rate.
The stability of our housing markets housing markets can be partially attributed to Texas state laws. It was only in 1997 that Texas opened the doors to home equity loan financing, and with it came some specific restrictions. Among them:
• The aggregate outstanding loan amount, including home equity loan debt, may not exceed 80% of the home’s value on a cash-out refinance (50% for home equity lines of credit).
• Closing costs are capped at 3% of the loan amount.
• A loan may only be refinanced one time per year.
• Prepayment penalties are prohibited.
• In addition to a three-day right of rescission, Texas law also instituted a 12-day waiting period before closing to allow borrowers time to read and understand their Good Faith Closing Cost Estimate.
All of these regulations served to limit the amount of leverage available to consumers secured by their homes. While home equity loans in other states permitted leveraging one’s home to well over 100% of its value, Texas law strictly prohibited these practices. This effectively protects the consumer from the temptation to go out and leverage their home to the hilt in order to buy a flat screen television and a new car.
Here’s the bad news. Because of the 80% limitation, homeowners are not fully able to tap into the equity, or ownership, in their home. This becomes troublesome when a homeowner is faced with cash flow challenges and has run out of other sources of ready cash. Their only way to tap this equity is to sell their home; not a particularly attractive option in a weak housing market.
In addition, the 3% closing cost rule makes refinancing small loans prohibitive for many mortgage lenders, as the closing costs on a $40,000 loan may exceed three percent simply due to the costs of title insurance, survey, appraisal, recording fees, and credit and flood reports; all of which are required by lenders as risk mitigation tools. A lender is typically not going to waive their requirements and increase the risk in an already weak loan portfolio for the nominal interest generated by a $40,000 loan.
If you are considering a cash-out refinance, weigh the benefits of both a traditional mortgage refinance and a home equity line of credit. The line of credit will typically come with an adjustable rate that can rise, but offers the flexibility of paying the line down and tapping it again in the future without additional closing costs. A traditional refinance might be best for homeowners who desire a fixed rate, believe they may move within the next 5-10 years, or do not anticipate tapping their home equity again down the road.
To find out more about mortgage refinancing in Houston, Spring, Tomball, The Woodlands, or Conroe Texas, speak with your mortgage professional about your options and keep in mind the costs involved in increasing your loan amount. The interest an on increased loan can easily amount to tens of thousands of dollars over the life of a loan.
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