Unless you live under a large rock on the Iron Islands, you've probably heard the news: Refinancing your mortgage can potentially save you thousands of dollars—especially if you refinance when rates are low.
So, what’s holding you back? If you’re like many homeowners, it might be that you've been inundated by so many misconceptions about refinancing that you've been deterred from even looking into it. And that's bad news—you could be wasting money month after month by not getting a lower interest rate.
Not sure what's fact and what's fiction? We're here to bust some of the most common refinancing myths so you can start saving some serious dough.
Myth No. 1: You're too late
We’ve been hearing a lot about how the Fed is raising interest rates, which might make you wonder if you’ve missed your chance to refinance.
Myth busted: Don’t worry, says Ray Rodriguez, regional mortgage sales manager at TD Bank in New York City.
“Even with the recent Fed rate hike, it's still a favorable environment, and refinancing can be a great move," he says—just as long as you're clear on the one-time costs associated with the refinance, and confirm that the transaction will lower your monthly payments.
What you're looking for is the break-even point of the loan, which is your total closing costs divided by the monthly savings. So if you're spending $3,000 in closing costs to save $100 a month in your mortgage payment, the break-even point will be 30 months—or just under three years. If you think you’ll be moving before then, you might not want to refinance. But if you're staying put, then you’ll start saving money after the 30 months are over and for the life of the loan.
Myth No. 2: You won't be able to qualify
If you got burned in the housing meltdown (or even if you didn't), you might be wary of approaching your lender for a refinance. After all, a lot of lenders pulled out of the market entirely, and the ones that stayed took an "extremely conservative approach" toward mortgage and refinancing guidelines, says Jill Moore, senior mortgage originator at Everbank in Jacksonville, FL.
Myth busted: Even if you're still struggling to get your credit back on track, you might qualify.
The guidelines "are starting to loosen up again," Moore says. "People who couldn't refinance due to credit issues—or maybe they lost their job or they started a new job—are now able to refinance."
Myth No. 3: You'll have to reset the clock to 30 years
Maybe you’re feeling good because you’ve already paid off 10 years of your existing loan, and the thought of restarting and moving the finish line back to 30 years sounds, well, long and daunting.
Myth busted: The right refinance product for you depends on your time frame and future plans; it might well not be a plain-vanilla 30-year loan, says Chuck Price, vice president of lending for New England Federal Credit Union, in Westbury, NY.
One great option if you're relatively certain you won’t be staying in the home forever is an adjustable-rate mortgage, which usually offers initial rates that are lower than a conventional fixed-rate loan. You’ll pay that lower amount for your choice of three, five, or seven years—however long you reasonably expect to be in the house—and ideally you’ll be ready to sell when the rate readjusts to the higher amount.
All that money you saved with your smaller payment can then be devoted to other financial needs, Price says.
Price urges caution, though: You should fully understand the initial, annual, and total rates associated with your mortgage product and its time frame, as well as a worst-case scenario of how high your payment could go if you don’t sell the house as planned. Make sure you ask as many questions as you need of your mortgage broker to ensure you have the right loan for you.
Myth No. 4: You can't refinance if you currently have an ARM
Did you take advantage of a low rate or special program with a seven-year ARM and then your plans changed? Maybe you’ve decided you want to stay in the house after all, or your pending relocation fell through. You might be worried that you're stuck indefinitely with the higher payments when the loan readjusted.
Myth busted: The great news is that even if you've taken advantage of only the “good” part of the ARM, you can still refinance, assuming your credit and circumstances warrant it. Maybe this time you want to get a fixed-rate mortgage, but for a shorter period of time than a regular 30-year mortgage.
If you can’t afford the cost of the 15-year payment, you can ask your lender for a 23-year mortgage, Price says. That way your final maturity date is not extended and the total interest paid doesn’t significantly escalate. You just need to do your homework and make sure that a creative option works best for your budget.
Myth No. 5: Refinancing allows you to change only your rates and terms
Maybe you're perfectly content with your monthly payments, and you see no reason to change the terms of your mortgage. Go, you! But refinancing isn't just about decreasing your mortgage payments or changing up your terms.
Myth busted: Cash-out refinancing can fund your home improvement projects, too. In fact, Moore says these types of refinances have become even more common as property values have soared and homeowners have finally rebuilt equity after the recession.
Just remember: If you refinance your mortgage and pull cash out of your equity to pay for home improvements, make sure you consider all the pros and cons before signing on the dotted line.
Myth No. 6: Refinances take too much time and effort
Ugh, just the thought of gathering all that paperwork can seem daunting.
Myth busted: Don’t stop before you even get started, Rodriguez says. The first call—to check in on your existing rate compared with current rates, and to find out if there’s a possibility your lender can save you money with a refinance–will take only a few minutes.
Now, we're not going to lie to you: It’s true that most conventional loans will require you to jump through hoops of income verification and an appraisal. But Jeremy David Schachter, mortgage adviser and branch manager for Pinnacle Capital in Phoenix, says that might not be the case if you currently have an FHA or VA loan and want to simply reduce your interest rate.
“Through a streamline refinance, you can possibly refinance your loan without an appraisal or even income verification,” he explains. Your mortgage lender can help you find out if you’re eligible.
Even if you do have to slog through some paperwork, it might be worth the payoff when you see your monthly payments come down.