Common Refinancing Myths

Refinancing is increasingly getting difficult and this trend is expected to prevail for a while before rates climb down and homeowners return to the market. Refinancing qualifications have become rather challenging. Conventional credit profiles are being scrutinized more. People with little or no home equity are at a loss on how to put their refinance plans into motion.

Here, we discuss some basics of refinancing. More importantly, we clarify some common refinance myths:

Myth: Refinance Eventually Leads to Losing Equity

Truth: This is a common misconception. Refinance doesn’t eat into your equity. In fact, it helps you save more over a longer period. This is true unless you opt for cash-out refinance where the loaned principal amount is raised. Secondly, some folks don’t understand the concept of building equity. Refinancing requires some strategy if you are serious about increasing your equity. More equity doesn’t mean getting a gift check from your lender or paying progressively lesser on your original loan.

Mortgage payments are made up of two parts. One part goes to your principal and the other towards the interest. If you find a refinancing option with no prepayment penalty, additional payments to decrease the principal helps. It allows you to create more equity. The refinance allows you to pay off the home loan in lesser time than the original loan period with negligible changes to your monthly payment pattern—these are significant savings!

Myth: Refinancing Before Reaching Breakeven Doesn’t Make Sense

Truth: This refinancing myth is the result of incorrect interpretations of breakeven period. Sometimes, rates drop to an irresistible low, luring people into refinancing aggressively. Some people start questioning the wisdom of refinancing when the breakeven of the previous loan hasn’t been fully realized.

People don’t look at the bigger picture. If the interest rate can be lowered to such an extent that you can absorb the new breakeven period and still get more equity, you should go for it! To avoid such confusions, follow the simple rule of keeping your refinancing decision one dimensional. If you can lower your rate without the need to repay more, you stand to gain. Please note that the best rate for you might not be the lowest rate in the nation. It is simply the best available option among the many mortgage quotes you receive.

Myth: Refinance Always Leads to Higher Closing Costs

Truth: Yes, refinancing helps you get some equity in times of crisis. Equally true is the fact that refinancing brings along some additional costs that aren’t always visible. Refinance calculations work out better in the customer’s favor when the credit amount is big. A slightly longer, bigger refinance helps to neutralize the high closing costs.

Before jumping on to conclusions work out the true cost of your refinancing proposal. Every refinanced mortgage comes with a GFE—Good Faith Estimate where the total closing cost is mentioned. This figure can be slightly confusing. Usually, it includes many components for which a borrower would be paying anyway. This includes partial or prepaid month interests, escrow property taxes, and escrow homeowner insurance. Besides these, other components such as documentation fees, application fee, credit report fees, and title insurance make up the true cost of refinancing.

Myth: Repeated Refinancing Approvals are Simply Impossible!

Truth: Refinancing isn't refused just because a borrower had refinanced in the recent past. There are no mortgaging or federal laws which limit lenders from lending to people who repeatedly refinance. Yes, the success rate for such refinancing applications might be lower, but the market understands that whenever lending rates are lower, refinancing will be in demand.

 

Some lenders prefer profiles where the customer has waited for a certain period before seeking another refinance. Some borrowers prepay on their existing loans to get a low rate refinance. Though there is nothing wrong with this strategy, it could lead to some losses. We recommend keeping a check on the prepayment penalties that have huge regional fluctuations. Prime mortgages are usually without substantial prepayment penalties.

Advantages of Getting a Mortgage Refinance

When homeowners decide to refinance their mortgage, their chief concern is to get lower interest rates. It is true that refinancing is a great way to get lower rates, but there are several other benefits as well.

If the interest rate on your existing mortgage is 6 percent and you can reduce it to 5 percent by refinancing, you should definitely go for it. Besides reducing your monthly mortgage payments, mortgage refinancing is ideal for long term cost savings. Here are some of the benefits of getting a refinance.

You can reduce the term of the loan

When you refinance, you get to reduce the term of your home loan. You can, for example, go from a 30-year term to a 15-year term. And when you reduce the term, you get lower interest rates. This will also reduce your interest costs. Your monthly payments will go up, but you will be able to pay off the loan faster. As a result, you can build up equity faster.

You get to switch from an adjustable mortgage to a fixed interest rate mortgage

It is true that ARMs have low interest rates during the initial period. But the rates can go up significantly when the loan resets. Worse still, there is no way you can predict what the rates will be five or ten years from now.

If you have an adjustable mortgage, you will be able to switch to a fixed interest rate mortgage when you get a refinance. This will also ensure your piece of mind.

Cash-out refinancing

If you get a cash-out home loan refinance, you will be able to turn your home's equity into cash. The value of your home may have appreciated over the years. If you feel that you have accumulated considerable equity, you can refinance the home at its current value and pocket the difference. You will be able to use that money for a home remodeling project or something similar. Make sure that you do not use this amount to splurge on unnecessary items. If you are not a disciplined borrower, a cash-out refinance will land you in even deeper debts.

Consolidate two loans

When you get refinance, you can consolidate your main home loan and a home equity loan. This will allow you to get an even lower monthly payment. In addition, you will need to make only one payment per month.

Recover from divorce

You and your spouse may be co-owners of the property. While there is nothing wrong with that arrangement, problems can arise if you decide to divorce. If, after divorce your ex-spouse doesn't contribute his/her share of the monthly payment, you will be in trouble. In this case, if you get refinance, you will have sole ownership over the property if you decide to keep the home.

If at least one of the above reasons appeals to you, you should consider the possibility of getting a refinance. Call your current lender and ask if they are willing to offer you lower rates. If they aren't, you should consider other lenders. You can search for lenders online. You should also consider contacting community banks. Whether you stick with your current lender or not, you can save a lot of money by getting a refinance provided that you have got the right reasons.