Record low interest rates over the last few years brought many homeowners to the refinancing table looking to lower their mortgage payments, and with talk that the Federal Reserve might be considering raising rates by the end of the year, consumers who haven’t taken advantage of the environment might want to act quickly.
Before you do, however, be sure to understand the process fully and the long-term financial impact of refinancing your mortgage. Here, the biggest refinance myths are debunked.
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1. Myth: Your Housing Costs will be Reduced
Undeniably, paying a lower interest rate on your mortgage will reduce your monthly housing outlay—saving you cash in the short term. But if you’re not careful, refinancing could end up costing you more money over the lifespan of your loan.
Let’s say that you have a mortgage that has still has 15 years’ worth of payments remaining. If you refinance to a loan with a longer term—such as a 30-year loan—you will be paying 15 years’ worth of additional interest payments since you increased the length of your mortgage.
Avoid doing this by picking a refinance option that keeps your term length the same or reduces it. (Click here to calculate your specific savings.)
2. Myth: You Must Have 20% Equity to Refinance
This misunderstanding owes its genesis to the recent housing crisis. In an ideal world, lenders want homeowners to have at least 20% equity in their house. But many, including the Federal Housing Authority and the Department of Veterans Affairs, are willing to offer you a refinance offer if you’re below that threshold. Additionally, the federal Home Affordable Refinance Program (HARP) is specifically aimed at helping homeowners with little or no equity.
Take note: If you have less than 20% equity and your current lender requires you to have private mortgage insurance, it’s highly likely that your refinancing lender will make you retain the coverage, too.
3. Myth: Your Bank Will Offer the Best Interest Rate
Many national and local banks waive fees for existing account holders that meet certain requirements. But when it comes to mortgage rates, it’s unlikely that your lender will give you a special rate simply because you’re a customer. To find the best rate, use a mortgage broker or inquire with several lenders—including credit unions and both online banks and stand-alone ones. Credit Sesame’s refinance search tool instantly compares multiple loans by their true savings and can help you find the right one.
4. Myth: You Need Extra Cash On Hand
While some lenders may offer to pay closing costs when you refinance, many simply pass the cost along to you in fees for your application, title insurance, an appraisal, an attorney, plus any pro-rated interest you must pay.
This can add several thousand dollars onto your refinancing bill. But contrary to popular belief, you probably don’t need to pony up the cash at your closing. Why? Oftentimes, lenders allow borrowers to roll these costs into the loan.
There are actually two ways that lenders allow you to finance your closing costs so you don’t need to pay them out of pocket. The first option is to select a higher interest rate. Most lenders offer rates that cover some or all of your closing costs. Almost all lenders offer a range of interest rates for the same refinance loan. The other option is to add the closing costs into your loan amount. If you do finance your closing costs as part of the loan, you’ll still want to make sure that the amount you save in interest will cover the closing costs within 24 months.
Don’t let these myths deter you from refinancing your home. Smart homeowners can save big bucks over time by refinancing their mortgage, and it can be well worth the time and effort.
About Credit Sesame: Credit Sesame is the consumer’s credit and lending expert, providing smarter financing for your world. We provide a complete picture of your credit and loans in one place, including your free credit score, credit monitoring, customized analysis, and unbiased loan and savings recommendations – all for free. Our proprietary savings recommendation engine, with bank-level analytics, monitors the market, runs thousands of scenarios and analyzes each consumer’s debt, to identify the best loans and savings opportunities.