7 Common Myths About Refinancing Your Mortgage
Even the savviest homeowner may be deterred by misconceptions about the refinance process and requirements.
If you’ve been looking at the increasingly lower interest rates and wondering when they’ll begin to rise again, you’re not alone. The improving economic landscape has undoubtedly given the Feds more confidence to ease their foot off the brake as we move forward in 2021. That said, refinancing could still be a terrific solution for many. However, even the savviest homeowner may be deterred by misconceptions about the process and requirements.
Let’s take a look at seven of the most common refinancing myths that scare off tentative borrowers – potentially costing them big.
Myth #1: You need 20% equity to refinance.
Just as when first purchasing, 20% down payment is seldom required, and 20% equity isn’t necessary to refinance. Although an 80% loan-to-value ratio is ideal, there are many lenders and products available to homeowners who haven’t achieved that yet. Some FHA and VA programs can even work with 100% refinancing, although private mortgage insurance (PMI) could be leveraged.
In spite of the pandemic, many housing markets remained strong which has buoyed home values. Even if yours hasn’t gained as much as 20% it’s still worth it to look into the possible savings provided by a lower interest rate.
Myth #2: Perfect credit is a must to qualify.
Needless to say, many people were negatively impacted in the past year through no fault of their own. Lenders understand that credit reports will reflect some possible late payments or other bumps in the road. However, even before the pandemic there have been many refinancing options for less than stellar FICO scores.
An excellent score in the 800s will certainly garner you a better interest rate, but even numbers below the average of 670 are in the realm that lenders have great programs for. Check your score ahead of time and see if there’s anything you can do to improve it proactively.
Myth #3: It’s all about a lower interest rate.
Yes, it seems like a no-brainer to refinance for the benefit of a reduced interest rate and ultimately, a lower monthly payment for your efforts. Among the many reasons to refinance is taking advantage of the equity in your home with a cash-out loan.
Done wisely, the combination of increased value and lower rates can be exceptionally helpful in providing cash for paying down high interest debt, remodeling projects, or perhaps creating a cushion of security after this difficult year.
Myth #4: It’s all about a reduced monthly payment.
Naturally, everyone’s financial objectives differ as much as their homes, lives and current circumstances. While one of the most significant benefits of refinancing is garnering a lower monthly mortgage payment, sometimes that is just a component of the goal to own your home sooner. If you have gained substantial equity in your home, and/or you can afford a slightly larger monthly payment, then refinancing to a reduced term could be a timely solution.
Taking advantage of a lower rate, current financial capacity, or a great refi product to reduce your current 30-year loan down to 10, 15, or 20 years can save tens of thousands in the life of the mortgage. This could be of special interest to those planning to stay in the home long term.
Myth #5: You should reach your break-even point on your current mortgage first.
The “break-even point” is the projected date when you will have recouped your original closing costs through the savings of a lower rate. Closing costs vary from lender, institutions and loan types, and typically land between 3% and 6% of the principle. They may include appraisal cost, credit report fees, title and origination fees.
Depending on the new interest rate you’re looking at, refinancing before the break-even point on your current mortgage might result in greater savings which could mean reaching an overarching break-even even sooner. A lender can help you calculate that point in time.
Myth #6: You’ll need cash for closing costs.
While the lender has some discretion on refinancing costs, as previously mentioned there are external fees with every transaction, appraisal, tax, and title fees for instance. If you’re looking to take cash out of the equity for whatever reason, then coming up with upfront closing costs would seem counterintuitive. That’s why most lenders are able to roll these fees into the new mortgage, eliminating the need for any cash up front. Just remember to calculate that break-even point for the best saving outcome.
Myth #7: Your best deal is with your current lender.
It may feel more comfortable or just easier reaching out to your original lender for refinancing, experts advise homeowners to shop around, and not just for a better rate. Chances are, your current lienholder isn’t even the bank or lender you began with, find the best for your particular situation and needs now. Ask friends and family for recommendations. Communicate your objectives and make sure they are listening.
After all, a trusted lender can happily bust the most common myths about refinancing and provide the facts that will make all the difference in your experience.
The team at Titan Mutual Lending (Titan) would love to help you navigate the misconceptions, discuss your financial needs, and ultimately save you money. As veterans in the mortgage business, we know you have choices so it’s our mission to give you the tools, guidance and support to take control of your success in this changing mortgage environment. Give us a call or contact us online today!