Sharing is caring!

If you are a homeowner who has a mortgage, it’s likely that you’ve been told about refinancing through the media and friends. This experience has probably cemented some arguments why refinancing your home loan is not a good idea.

Without a doubt, refinancing is not the right thing to do for all homeowners.  For this reason, you need to reach a smart decision to see if it is the best thing for you to do by dispelling some myths.

Defining a Mortgage Refinance
In terms of real estate, refinancing is the process of paying off a mortgage replacing it with a new mortgage. The most popular home loan type is a 30-year fixed. The following are some common myths about refinancing.

Myth #1. A mortgage refinance will result in losing equity
Unless you choose a cash-out it is not true that your home equity will decrease significantly.  Your principal balance should be very close to what your current balance owed is apart from closing costs. As of October 2019, the median priced home in Orange County, CA is $720,500. Let’s say you owe $500,000 and the closing costs are $3,600 with zero points.

Myth #2. I was recently declined for a refinance, I will be declined again
False. This does not mean you will not be able to refinance. Lots of lenders deny the loan request due to not enough income or equity or due to employment reasons. If this is the case, there is still hope with the hundreds of programs that mortgage brokers have access to.

Myth #3. The closing costs are too high
In ninety-nine percent of loan applications, closing costs are tied to a loan, whether or not you pay them outside of the refinance or add them to the loan balance. Whenever you see a no-closing cost rate marketed on the radio, TV or online, it means the interest rate being offered is higher to cover those closing costs.

Even when you add in the closing costs, refinancing can save you a considerable sum of money over time. For example, you refinance your home with a $500,000 mortgage from a 5.625% interest rate to an interest rate of 4.875%, with closing costs of $3,600.

With the payment dropping from $2,878 to $2,646, you’ll save $232 each month. If you divide the $3,600 of closing costs by $232, you get 15.5 months. That means in just one year and three months, you’ve recovered the closing costs you paid to refinance, and anything after that month is savings for your household.

The numbers are even more significant if you look at the long term interest savings.  With the lower rate you’ll pay  $952,575 compared to $1,036,182 with your current interest rate. That’s a savings of $83,607 at the end of 30 years, and to achieve that you pay only $3,600 to see those savings in this refinance example.

Myth #4. I need to have built up 20-percent home equity
This is not true. While some lenders require a 20% down payment for a purchase loan, the need for 20% equity for a refinance is not accurate. In some cases, taking on mortgage insurance could wind up saving you more money in the long run.

Myth #5. You refinanced your current loan but didn’t reach the break-even point.
Just because you have not hit the break-even point for your recent mortgage refinance, doing another refinance to attain a lower interest rate may actually help you get to a break-even point (and increased savings) a lot faster.

Myth #6. You need cash to pay for closing costs.
The closing costs for a refinance will be very similar to those you paid when you bought your home originally. A couple of fees, settlement and title insurance are always lower than a purchase loan.

Like a purchase loan, you have a couple of choices. The first is to add the closing costs to your mortgage balance. The second is take a slightly higher rate and user “lender credits” to reduces your closing costs or pay them entirely making it a “no-cost” refinance possible.  It is is still advantageous to accept a lender credit that lowers your rate by .50% and you pay no costs and your loan balance doesn’t increase.

Myth #7. It is not good to refinance your home to consolidate short term debt
This depends on your personal finances. If you’re thinking about a cash-out refinance to pay off credit card debt, in all probability it’s due to the fact your monthly payments are causing serious financial hardship.

If the credit card payments are putting you in a struggling position, a mortgage refinance could be the right solution. A $7,500 credit card balance with an 18.9% interest rate takes 335 months to pay in full when you make 2.5% minimum payment.

The total payments come out to $19,602. Your other credit card has a balance of $15,000 at a 17.9% interest rate takes 360 months to be fully repaid using a 2% minimum payment. The total payments come out to $52,059.

When short term debts are three to four times what mortgage interest rates are and you’re only sending in the minimum monthly payment, plus the interest compounds it can make short term debt become long term.  The key is not use your credit cards the same way you did prior to a refinance. Racking up credit card debt is not a good long term personal finance goal for anyone.

Myth #8. It’s easier to refinance with your current lender
You are free to refinance with any mortgage lender that has an active NMLS license to originate loans in your state. Many mistakenly think it’s simpler to start the process with your existing lender, but that is not actually true.

Your income, employment, and assets all need to be confirmed before closing. There is no advantage in closing quicker with your current lender as all information needs to be updated and reverified.

Now that you understand what’s true and what isn’t explore your options with a mortgage lender you trust.