Whenever mortgage interest rates decline drastically, there’s an explosion in home loan refinancing. Unfortunately, along with the benefits of refinancing, comes a lot of misinformation about the process.
Mortgage Refinancing: Myth vs Reality
Listed below are some common mortgage refinancing myths along with a brief explanation of the reality.
Myth: You can only refinance your mortgage once.
There’s no limit to how many times you can refinance your mortgage. However, the fees can be substantial, so it pays to make sure that each refinancing makes sense. Use a reliable refinance calculator or — even better — talk with a reputable mortgage broker, particularly if you refinanced your home loan in the past few years.
Veterans Administration (VA) loans have strict requirements regarding benefit to the borrower, and are subject to different guidelines about required reductions in interest rate and payment in order to refinance. These requirements are transaction-specific, so consult with a reputable mortgage lender.
Also, if you have a prepayment penalty on your loan, you could be charged if you attempt to refinance again. Although very few mortgages come with a prepayment penalty these days, it pays to ask before you settle on a refinance lender.
Myth: You need cash to cover closing costs.
Refinancing includes closing costs similar to the ones you paid when you got your original mortgage. If you don’t want to pay for closing costs up front, you have a couple of options:
- You can have the lender provide a credit towards your costs, which results in a slightly higher interest rate.
- Add your closing costs to your mortgage balance.
Either option can reduce your closing costs and make a “no-cash” refinance possible. A wide range of possibilities is available, so discussing your goals with your mortgage professional is important.
Myth: An appraisal won’t affect your refinance rate.
An appraisal is a primary driver of your interest rate because it determines your loan-to-value (LTV) ratio. A higher LTV, such as when you borrow more than 80 percent of your home’s value, requires private mortgage insurance (PMI) and a slightly higher interest rate.
Be sure to work with a lender who hires a local appraiser who can give you an accurate value. Also, it’s a good idea to clean up your home before an appraisal so it doesn’t appear that you have any deferred maintenance issues.
Myth: You won’t need a credit check.
Some people are surprised that lenders require a credit check for refinancing a home loan. After all, you’ve been repaying the loan on time, so why should they want to recheck your credit? But to any lender, it’s a new loan, so they have to verify the current state of your finances. This even applies when you are trying to refinance with the company that services your current loan.
Before you apply for refinancing, check your credit score and debt-to-income (DTI) ratio. A primary objective of refinancing is to get the lowest interest rate, so you’ll want to make sure your financial status is good enough to qualify for the best rate possible.
Myth: Your current lender can offer you the best rates.
Your current lender may insist that they can get you the lowest refinance rate, but that’s often not true. Interest rates, loan programs, and fee structures change frequently, so we always encourage borrowers to shop around with other lenders.
Myth: A refinance will affect selling your house later.
Unlike home equity loans or lines of credit, refinancing your mortgage doesn’t put an additional lien on your home. Refinancing is strictly based on your ability to pay back the loan as evidenced by your credit and employment history. It just swaps out the primary lien on the home with a new one. Consequently, it shouldn’t have an impact on when you can sell it.
Myth: Most homeowners can’t qualify for a mortgage refinance.
Some borrowers have “low financial self-esteem,” so they don’t consider refinancing — Without even finding out if they can qualify. Also, a lot of people think their credit is worse than it is. But even if you do have challenged credit, a mortgage broker may be able to help you.
Myth: Refinancing doesn’t cost anything.
Homeowners usually hear a lot about how much they can save by refinancing their mortgage, but they rarely hear about the fees and closing costs associated with doing so.
Many of the costs you paid for your original mortgage also apply to a refinance. Even if you roll these costs into your new loan, it will increase the principal you must repay.
A reputable lender will make sure that these costs are more than offset by how much you’ll save in monthly interest payment reductions.
Myth: The interest rate is the most important thing.
For many homeowners, the goal is to get the lowest interest rate possible to maximize savings. But there are a lot reasons to pursue a refinance other than getting a lower rate. Maybe you have built up equity in your home and want to take some cash out to do renovations or consolidate some other high-interest debts.
The term of the loan is another savings variable borrowers should consider before refinancing. Homeowners who are keen on saving money over the life of their loan can either refinance into a lower-rate and shorter-term loan, or make extra monthly payments to repay the loan faster.
In addition, there are many more flexible term options that can make it easy to refinance your loan without extending your loan term at all. Options like an 8-year or 12-year term are available, and can help your refinance fit into your future financial goals.
Myth: You won’t save that much money by refinancing.
Maybe. But refinancing could save you a significant amount in interest, depending on your current loan rate and the rates available now. For instance, reducing your rate by just 1/8th of a percent could save you tens of thousands over the life of your loan. Be sure to check with a competent lender to see if refinancing at today’s interest rates makes sense for your situation.