Debunking Common Refinance Myths
Summary: A refinance allows homeowners to replace their current mortgage with either a rate-and-term or a cash-out refinance. There are a lot of myths lurking about when homeowners are in the market to refinance. To ensure a successful and stress-free refinance, we have debunked eight common myths.
A refinance allows homeowners to replace their current mortgage with a rate-and-term or a cash-out refinance. The transition can provide homeowners with a better interest rate, lower monthly mortgage payment, or the option to use their equity to take cash-out. A rate-and-term mortgage refinance allows homeowners to change their interest rate or the loan term. A cash-out refinance allows homeowners to replace their previous mortgage with a new one and cash-out the difference by taking advantage of the equity within the home.
Eight Common Refinance Myths
Myth 1: You Must Reset Your Loan Term
Gone are the days when a homeowner must reset their loan term when refinancing. Instead of starting the loan repayment clock again, homeowners can opt-in for a flex term.
A flex term allows borrowers to tailor their loan term based on their unique financial situation. The flex term gives borrowers the opportunity to customize the length of their home loan, between 8 and 30 years, with a fixed interest rate.
Myth 2: You Need 20% In Home Equity to Refinance
The need for 20% in home equity depends on the loan type. A rate-and-term refinance allows homeowners to change the rate or term of their existing mortgage and refinance with less than 20% in equity.
Homeowners who wish to withdraw cash from their home with a cash-out refinance, however, need at least 20% in home equity.
Myth 3: You Need to Reach The “Break-even Point” Before You Can Refinance
The break-even point is when the homeowner has recouped from the closing costs of the home purchase. It may be recommended for homeowners to wait to refinance until they reach their break-even point; however, refinancing to a lower rate can help in reaching the break-even point faster and receive significant savings (lower interest rates or a shorter repayment term).
Myth 4: You Will Not Need a Credit Check
From pre-approvals to refinances, mortgage lenders always check an applicant’s credit score. Some homeowners may question the reasoning behind a lender running a credit score check when there is already an existing housing loan. Well, credit scores could have changed between the closing of the home purchase and the refinance period. Homeowners may also work with different mortgage lenders for their refinance mortgage; therefore, the new lender will want to assess the homeowner’s credit history before offering them refinance options.
In most cases, the higher the credit score, the better the refinance options. If your credit score is low, you may still qualify for a mortgage but here are some tips to help improve it!
Make Payments on Time.
- Shows consistency and responsibility towards the loan.
Do Not Close Credit Cards.
- Shortens your credit history and affects your credit utilization ratio.
Increase Credit Limit.
- The goal behind the increase is to improve your credit utilization ratio which impacts your credit score.
- Do not use the entire new amount.
Keep Your Balance Low.
- A high debt balance may demonstrate unhealthy spending.
Myth 5: You Can Only Refinance Your Mortgage Once
There is no limit to how many times a homeowner can refinance their mortgage; however, be aware of the costs associated with a refinance mortgage and evaluate your situation before embarking on one.
Before or during the refinance process, you may want to ask yourself or your loan expert the following questions to be financially conscious.
- What are my financial goals?
- How long will I be living in the home?
- How much are the closing costs?
- What fees can I expect?
Myth 6: Refinances Are Only About Getting a Lower Rate
Low interest rates may be a leading incentive to refinance, but homeowners refinance for many reasons. A handful may opt-in for a cash-out refinance to withdraw equity for debt consolidation or a home renovation. Others may alter their loan term to pay off the housing loan earlier and save on interest or extend the loan term for lower monthly payments. There is more to refinancing than a lower interest rate!
Myth 7: Refinancing Will Always Lower Your Monthly Costs
Many homeowners refinance to change their loan terms or loan type. When homeowners refinance to a shorter loan term—for example, going from a 15-year loan term to 12 years—the monthly payments are higher.
Refinancing does not always mean a lower monthly payment; refinancing is adjusting your loan terms to better fit your financial and home needs.
Myth 8: If You Have Been Denied A Refinance In The Past, You Cannot Be Approved Again
Situations and circumstances change, therefore, homeowners can refinance after being rejected. Some applicants may have been turned down due to equity and credit score requirements. It is encouraged to actively improve credit scores and pay off debts to have a low debt-to-income ratio (DTI). These healthy habits will improve the likelihood of applicants getting approved for a refinance and receiving favorable loan terms.
For more information, chat with us at callhallfirst.com or give us a call at 866-Call-Hall.
