If financial resolutions are top of mind for the 2020 New Year, you might be considering refinancing your mortgage. Find out why it’s a great time for a refi, and what you need to get started.
If one of your New Year’s resolutions is to get your financial house in order, you may be thinking small: meal prepping for the week and ditching the lunchtime deli run; making your coffee at home instead of stopping at Starbucks for that morning latte. And, while these steps definitely represent a good start, you might just find that you get a much bigger return on your investment of time and money by refinancing your home in 2020.
A home loan refinance can save you money month after month for better cash flow in the short term, then save you thousands in interest over the life of your loan. That’s a financial windfall that pays dividends long after your other resolutions have fallen by the wayside (green juice and kettlebells, anyone?).
Why Is It the Right Time to Refinance Your Mortgage?
There are a variety of reasons for refinancing your mortgage and any of them may offer the incentives you've been looking for.
Lower Interest Rate
Of course, one of the primary reasons that people refinance is in order to take advantage of a lower interest rate. Current interest rates are low, and an interest rate reduction of 0.5% or more can result in significant savings, depending on the size and term of the loan.
Interest rates don't just change at the market level. If your personal credit rating has improved significantly since you bought your home, then that hard work might just pay off and you may find yourself eligible for a more attractive interest rate. In addition, if your professional progress has resulted in a significantly higher income, you may now qualify for a lower interest rate, especially if you have paid down debt in the meantime.
Shorter Loan Term
If, like most people, you currently have a mortgage with a 30-year fixed rate, you may want to refinance in order to take advantage of the benefits of a shorter loan term. While your monthly payment may be higher, the advantage of paying off your mortgage years earlier than you had planned offers a powerful incentive for refinancing.
This is especially useful if an early retirement is one of your goals, since eliminating your monthly mortgage payment years earlier can fast track that plan. So, whether it’s more time to watch Maury or a beach shack in Maui, those retirement goals could be attained sooner than you think.
Shift from ARM to FRM
If you originally bought your home with a 5/1 adjustable-rate mortgage (ARM), you may be ready to shift to a 15-year or 30-year fixed-rate mortgage. This can help to future-proof your mortgage by locking in a low fixed rate, rather than leaving you open to the uncertainties of an adjustable-rate mortgage.
Tap into Home Equity
If you have significant debt – either commercial, student loans, or medical bills – you may want to tap into your home's equity when you refinance your mortgage. This could enable you to consolidate your other existing debt, subsequently improving not only your month-to-month cash flow but your overall debt-to-income ratio. Alternatively, you may want to use that extra money for large-scale repairs or upgrades to your home.
If you have significantly improved your home since you purchased it, you may have even more equity than you expected, offering you the opportunity to refinance at a higher loan amount.
What is the Process Like?
The refinance process will be somewhat similar to the process of obtaining your original mortgage. One big advantage? You won’t be under the time crunch of an imminent closing and moving process, so there is less pressure involved. Since you are already in the home, you can take some time to figure out what mortgage scenario works for you.
Part of your decision-making should include a review of not only the way that your new loan will affect your payoff and amortization, but at what point you’ll “break even” on the refinance. The closing of a refinanced mortgage involves closing costs, taxes, fees, and other charges – just as they did when you first took out your home loan. You’ll reach break-even point when the amount you’ve saved on your new mortgage equals the amount you spent on the refinance.
What Do You Need to Have in Place Before You Refinance?
As was the case when you first took out your mortgage, you’ll need to provide various information and documentation for your refinancing process. This will outline your financial and professional picture in order to move you through your lender’s underwriting and approval process.
Optimal Credit
The better your credit score, the better your interest rate is likely to be. The following are the various credit score categories and how they are typically viewed by lenders:
- 800-850: Exceptional
- 720-799: Very Good
- 680-719: Good
- 620-679: Fair
- 580-619: Poor
- Less than 580: Very Poor
For borrowers with credit scores of 620 or higher, there should be a fair number of standard loan options available. For borrowers with lower credit scores, there may still be loan options – but they may require higher fees and/or a higher interest rate. Again, it is important to take a look at your individual circumstances to determine the scenario that fits your specific financial needs.
Documentation
You will need to put together some documentation so that your loan underwriter can evaluate your finances and your earnings. These include:
- Tax returns (generally for the past two years)
- Two years of business tax returns and profit and loss statements from the most recent quarter (if self-employed)
- Two most recent paystubs
- Two years of W-2s, or 1099s if self-employed
- Most recent mortgage statement
- Two most recent statements for retirement/savings/brokerage accounts, if applicable
- Copy of your homeowners’ insurance policy
If you have received gift funds from a family member or a bonus at work, you may be asked to submit documentation for verification of these deposits. In addition, you will need to provide information about your existing mortgage, in order to facilitate the payoff, and proof of your current insurance.
Finally, as you are thinking about things to gather and things to do during the process, remember there is one big thing to avoid: taking on additional debt prior to approval of your refinance loan. Yep, that new car or new furniture can wait – racking up additional liabilities can alter your debt-to-Income ratio and potentially jeopardize your loan’s approval.
Why Choose Simplist for Your Mortgage Refinance?
Refinancing is all about finding the very best option so that you can maximize your savings. That’s why Simplist’s process is ideal. We seek to match you with the lender that’s best suited to your current situation, with two options tailor-made for your needs:
- Rate & Term: This allows you to optimize your interest rate and the timeline of the loan in order to save you the most money, both on your monthly payment and over the life of the loan.
- Cash Out: This allows you to maximize the equity in your home and extract it for other financial needs and goals.
Want to get started? You can begin the process online, or talk to one of our loan experts for more information and to weigh the option that’s right for you. Let’s get you on track to crush those financial resolutions!