5 Biggest Myths About Mortgage Refinance

 

Key Takeaways

• A common mistake about mortgages is thinking that refinancing is free. Actually, you have to pay fees, which can be 2 to 5 percent of your mortgage amount.

• When you refinance, your house doesn't get a new claim on it, but you do need to pass a credit check.

• You can refinance your house more than once, but usually, you need about 20 percent equity.

Myth 1: Refinancing is free.

Actually, no. When you refinance your mortgage, you can save money in the long run. But there are costs you have to pay upfront that many people don't talk about. You don't need to make a down payment, but there are still closing costs, just like when you got your first home loan.

These costs can be between two and five percent of the new loan's amount. For example, if you're refinancing a $250,000 mortgage with three percent fees, you'd have to pay $7,500 upfront. Some lenders let you add these costs to your new loan, but that means you'll have to pay more back in the end.

Myth 2: The interest rate is the most important factor.

Actually, getting a good interest rate is a big deal for many homeowners. But before you refinance, it's important to think about the loan term too, because it can affect how much you save.

When you refinance to a loan with the same term, like another 30-year loan, the payment schedule starts over. For example, if you've been paying for 10 years, it goes back to zero. This means you end up paying more overall because most of your early payments went to interest.

Switching to a loan with a lower rate and a shorter term, like a 15-year mortgage, can help you save money in the long run. Or, you could make bigger monthly payments to pay off the loan faster.

Myth 3: Selling the house will be impacted by a refinance.

Actually, when you refinance your mortgage, you're not adding any extra claims on your house. You're just swapping out the old mortgage for a new one. So, refinancing doesn't affect selling your home or your ownership title in any way.

It's important to note that mortgages aren't as bad for your property as other types of claims, like liens. When you sell your house, the money usually goes towards paying off any loans, including your mortgage.

When you refinance, the only things that matter are your credit score and work history, which show if you can pay back the loan. This won't limit selling your house any more than your original mortgage did.

Confusion sometimes comes from other types of loans, like home equity loans or lines of credit. These use your house as collateral and can affect selling your home if you haven't paid them off yet.

Myth 4: A credit check is not necessary.

Actually, when you refinance your home loan, lenders will want to check your credit. You might wonder why, especially if you've been paying your loans on time. But to them, it's like you're getting a new loan, so they need to make sure you're in good financial shape.

The best refinancing rates usually go to homeowners with high credit scores, like above 760. Lenders also want to see that you don't have too much debt compared to your income. They look at something called your debt-to-income ratio, which should ideally be less than 36%. Some people might be surprised to find out they don't qualify.

So, before you apply to refinance, check your debt-to-income ratio and your credit score. The goal is to get the best rate possible, so make sure your finances are strong enough for it, or at least better than before.

Myth 5: Refinancing your mortgage is only possible once.

Actually, you can refinance your mortgage more than once. Some people think you can only do it once, but that's not true. You can do it as many times as you want. But since it can cost a lot, you need to make sure it's worth it each time. If you've refinanced recently, you can use a refinance calculator to see if it's a good idea to do it again.

You might need to wait a bit between refinances. Some lenders want you to wait a certain amount of time before you can do it again. But technically, you can refinance as many times as you need to. Just remember, if you refinance again too soon, you might have to pay a penalty on your loan.

Also, not many mortgages have penalties for paying them off early these days, but it's still smart to look around for the best lender before you decide to refinance.

FAQs regarding refinancing a mortgage

Can you refinance at the same interest rate?

No, when you refinance, you get a new loan with new terms and a different interest rate. It's not possible to keep the same rate. To find the best loan, compare rates from different lenders.

Do refinance rates cost more than purchase rates?

Yes, usually refinance rates are higher. Lenders see refinancing as riskier, so they charge more. But your rate depends on things like your credit score.

Does refinancing use up your home equity?

Sometimes. With a cash-out refinance, you can get extra money, but you'll have a bigger mortgage to pay back. Usually, you need at least 20% equity to do this.

Do you need 20% equity to refinance?

Not always, but most lenders prefer it. Having less equity might mean higher costs.

Does refinancing start your loan term over?

Usually, yes. Refinancing often means starting your payments again unless you choose a shorter term.

Are all lender rates the same?

No, rates vary, so it's important to compare. Even a small difference can save you money in the long run. Also, check annual percentage rates (APRs) to see the true cost of the loan.

Can you reapply if your refinance is rejected?

Yes, if your finances improve, you can try again. You can also try a different lender at any time.