We typically usher in a new year by embarking on ambitious resolutions -- lose those extra pounds, exercise more, spend less time on the phone, or to spend less. Perhaps debt elimination made your list.
With interest rates expected to remain near historic lows for the foreseeable future, this could be the perfect time to wield the most powerful debt-paring tool available to homeowners -- the refinance.
Nationally, long-term mortgage rates have risen slightly but remain below 4 percent and are relatively stable. Analysts say refinances nearly doubled in 2019, with homeowners collectively utilizing equity in amounts not seen in over a decade. Applications for mortgages, including refinances, rose almost 4 percent in December alone.
Any homeowners considering refinancing should analyze their individual circumstances before jumping on this bandwagon. Local mortgage lending experts say to justify the costs and time involved in a refinance you should realize a rate improvement of at least .75 percent and remain in your home for at least three years from the date of the loan.
In addition to lenders' fees, other considerations include appraisal costs, attorney fees, the effort involved in securing records, signing paperwork, and otherwise being available to shepherd the process. Because local property values have risen significantly, however, a homeowner could possibly eliminate mortgage insurance through a refinance.
Interest rates are the most obvious factor in the recent increase in refinances but other favorable terms taking effect in 2020 could render it even more attractive. Conforming loan limits are set to increase substantially. In other words, it's possible to borrow up to $510,400 on a primary home with a down payment of only 3 percent with a conventional loan. For FHA loans, the limit is $331,760. Veterans Administration (VA) loans have eliminated the limit altogether, allowing 100 percent financing. The incentive doesn't stop there. Under North Carolina law, fully disabled veterans are exempt from payment of taxes on the first $45,000 in assessed home value.
Recent loan qualification ratios (debt-to-income ratios) are flexible. Those with a strong credit score can qualify for a loan with payments of 49 percent of their income for conventional loans, and even higher for FHA and VA loans.
Credit scores factor heavily into the ultimate interest rate. Lenders charge higher rates to offset the risk associated with lending to anyone with questionable credit history. Accordingly, anyone considering refinancing should ensure their "house is in good order" by reviewing their credit reports and scores. You must maintain a score of at least 620 to qualify for a mortgage, but for the best rates strive to maintain a score of at least 740.
With a little time and legwork, homeowners can put their equity to work, allowing them to realize a resolution that will prove meaningful for many years and decades to come.