Six Common Refinancing Myths That Could Be Costing You Money

By July 26, 2017News

Refinancing your mortgage can potentially save you thousands of dollars—especially if you refinance when rates are low. So, what’s holding you back? If you’re like many homeowners, you might have been inundated by so many misconceptions about refinancing that you’ve been deterred from even looking into it. And that’s bad news—you could be wasting money month after month by not getting a lower interest rate. Not sure what’s fact and what’s fiction? Here, busts some of the most common refinancing myths so you can start saving some serious cash. 

Myth No. 1: You’re too late

We’ve been hearing a lot about how the Fed is raising interest rates, which might make you wonder if you’ve missed your chance to refinance.

Myth busted: Don’t worry. Even with the recent Fed rate hike, it’s still a favorable environment, and refinancing can be a great move—just as long as you’re clear on the one-time costs associated with the refinance, and confirm that the transaction will lower your monthly payments. What you’re looking for is the break-even point of the loan, which is your total closing costs divided by the monthly savings. So, if you’re spending $3,000 in closing costs to save $100 a month in your mortgage payment, the break-even point will be 30 months—or a little less than three years. If you think you’ll be moving before then, you might not want to refinance. But if you’re staying put, then you’ll start saving money after the 30 months are over and for the life of the loan.

Myth No. 2: You won’t be able to qualify

If you got burned in the housing meltdown (or even if you didn’t), you might be wary of approaching your lender for a refinance.

Myth busted: Even if you’re still struggling to get your credit back on track, you might qualify. The guidelines are beginning to loosen again. People who couldn’t refinance due to credit issues—or maybe they lost their job or they started a new job—now are able to refinance.

Myth No. 3: You’ll have to reset the clock to 30 years

Maybe you’re feeling good because you’ve already paid off 10 years of your existing loan, and the thought of restarting and moving the finish line back to 30 years sounds long and daunting.

Myth busted: The right refinance product for you depends on your time frame and future plans; it might well not be a 30-year loan. One great option if you’re relatively certain you won’t be staying in the home forever is an adjustable-rate mortgage that usually offers initial rates that are lower than a conventional fixed-rate loan. You’ll pay that lower amount for your choice of three, five or seven years—however long you reasonably expect to be in the house—and ideally you’ll be ready to sell when the rate readjusts to the higher amount. All of the money you saved with your smaller payment then can be devoted to other financial needs. Note: Make sure you fully understand the initial, annual and total rates associated with your mortgage product and its time frame, as well as a worst-case scenario of how high your payment could go if you don’t sell the house as planned. Ask as many questions as you need of your mortgage broker to ensure you have the right loan.

Myth No. 4: You can’t refinance if you currently have an ARM

Did you take advantage of a low rate or special program with a seven-year ARM and then your plans changed? Maybe you’ve decided you want to stay in the house after all, or your pending relocation fell through. You might be worried that you’re stuck indefinitely with the higher payments when the loan readjusted.

Myth busted: The great news is that even if you’ve taken advantage of only the “good” part of the ARM, you can still refinance, assuming your credit and circumstances warrant it. Maybe this time you want to get a fixed-rate mortgage, but for a shorter period of time than a regular 30-year mortgage. If you can’t afford the cost of the 15-year payment, you can ask your lender for a 23-year mortgage. That way, your final maturity date is not extended and the total interest paid doesn’t significantly escalate. You just need to do your homework and make sure that a creative option works best for your budget.

Myth No. 5: Refinancing allows you to change only your rates and terms

Maybe you’re perfectly content with your monthly payments, and you see no reason to change the terms of your mortgage. However, refinancing isn’t just about decreasing your mortgage payments or changing up your terms.

Myth busted: Cash-out refinancing can fund your home-improvement projects, too. In fact, these types of refinances have become even more common as property values have soared and homeowners have finally rebuilt equity after the recession. Just remember: If you refinance your mortgage and pull cash out of your equity to pay for home improvements, make sure you consider all the pros and cons before signing on the dotted line.

Myth No. 6: Refinances take too much time and effort

Just the thought of gathering all that paperwork can seem daunting.

Myth busted: Don’t stop before you even get started. The first call—to check in on your existing rate compared with current rates, and to find out if there’s a possibility your lender can save you money with a refinance–will take only a few minutes. It’s true that most conventional loans will require paperwork in the form of income verification and an appraisal, but that might not be the case if you currently have an FHA or VA loan and want to simply reduce your interest rate. Through a streamline refinance, you can possibly refinance your loan without an appraisal or even income verification. Your mortgage lender can help you find out if you’re eligible. Even if you do have to complete some paperwork, it might be worth the payoff when you see your reduced monthly payments.