5 Biggest Myths About Mortgage Refinance

Key Takeaways

• A typical mortgage mistake is thinking that refinancing is free. You must pay fees of 2 to 5 percent of your mortgage amount.

• When you refinance, your house doesn't get a new claim, but you must 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. Refinancing your mortgage can save you money in the long run. However, there are upfront costs that many people need to talk about. You don't need to make a down payment, but there are still closing costs, 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 must pay $7,500 upfront. Some lenders let you add these costs to your new loan, so you must repay more.

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

Getting a reasonable interest rate is a big deal for many homeowners. But before you refinance, it's essential to consider the loan term 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 returns to zero. You spend 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. You could also make more significant monthly payments to repay the loan faster.

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

When you refinance your mortgage, you don't add any extra claims to 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 are better for your property than other 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 whether you can repay the loan. This will only limit selling your house as much as your original mortgage did.

Confusion sometimes comes from other loans, like home equity loans or lines of credit. These use your house as collateral and can affect selling your home if you still need to pay them off.

Myth 4: A credit check is not necessary.

Lenders will want to check your credit when you refinance your home loan. 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 ensure you're in good financial shape.

The best refinancing rates usually go to homeowners with high credit scores above 760. Lenders also want to see that you don't have too much debt compared to your income. They look at 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, or at least better than before.

Myth 5: Refinancing your mortgage is only possible once.

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 must ensure 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 should wait between refinances. Some lenders want you to wait a certain amount before you can do it again. But technically, you can refinance as many times as you need to. Remember, if you refinance again too soon, you might have to pay a penalty on your loan.

Also, only a few mortgages have penalties for early payment, but it's wise 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 other lenders.

Do refinance rates cost more than purchase rates?

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

Does refinancing use up your home equity?

Sometimes, a cash-out refinance can give you 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?

Only sometimes, 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 essential to compare. Even a slight difference can save you money in the long run. Also, annual percentage rates (APRs) should be checked to see the loan's actual cost.

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.