The Buzz

You’ve likely heard all the buzz about why you should refinance your mortgage. Yet the process of refinancing can feel overwhelming for a first-time (even multiple-time) refinancer. If you’ve felt like you’re in over your head regarding refinancing, you’re not alone. Between complicated math, dealing with large financial institutions, and credit scores, the mortgage process can be intimidating. Additionally, the decision to refinance is further complicated by myths, misnomers, and misunderstandings about the benefits of refinancing, the costs, and the steps.

To simplify your decision on whether it’s the right time and best decision to refinance, we’ll help explain and resolve the most common refinancing myths.

Myth 1: You should only refinance if you have 20% or more equity.

Of all the myths we hear about refinancing, this is the one that comes up the most. This myth is based on the loan-to-value (LTV) ratio. The LTV is a number that is commonly used by lenders to determine your lender risk rate, which is similar to your loan-worthiness based on your credit score.

Why this myth is false:

Your LTV is not the only factor lenders take into account when deciding on your loan-worthiness. They also look at your credit score, income, and other assets. So, if you have an excellent credit score, you may find a lender that will gladly refinance your home loan, even if your LTV is greater than 80%

How LTV works:

A mortgage lender wants you to be invested enough in your property to continue paying on it. If you have paid down 20% or more of your home’s value, they perceive you as less likely to default on your mortgage.

The most common ratio tossed about and used by lenders is 80-to-20 or that your home is worth 20% more than what you owe on it. You can figure out your own LTV by dividing the remaining mortgage amount on the home by the appraised property value.

Myth 2: The break-even point of your loan is the “sweet spot” for refinancing.

Why this myth is false:

First, most homeowners don’t know what a mortgage break-even point is. Your break-even point is when the cumulative amount of money you save on your monthly mortgage payment balances out with your refinancing costs.

Second, the “sweet spot” in relation to a break-even point is not the only factor to consider when refinancing.

This myth doesn’t take into account that many people have wildly different situations and reasons to refinance. For example, many people want to use some of the refinancing funds to renovate or eliminate FHA mortgage insurance.

Myth 3: The interest rate is the only factor that matters.

Why this myth is false:

Homeowners often feel compelled to refinance when they hear about record-low interest rates. But as you know, mortgages and financial decisions are more complicated than just a new interest rate.

While your new interest rate is a major factor in refinancing, it’s not the only factor you need to consider when making the decision.

Lenders should also factor in:

• Closing costs and fees
• Long-term financial goals
• Future relocation: If you’re planning to sell your home before your break-even point, you will lose money on refinancing.
• Loan terms: Does adding to the principal offset the monthly savings over the lifetime of the loan?

Myth 4: Refinancing is essentially free.

Why this myth is false:

When it comes to refinancing, you can save a lot of money in the long run. However, refinancing comes with its own costs.

Even if your lender offers extremely low-interest rates, there are always fees associated with processing your home loan. Furthermore, your time comes with a cost. Researching lenders, gathering the necessary documentation, and going to closing all take time, energy, and effort.

Myth 5: You already have a mortgage. There’s no need for a new credit check.

Why this myth is false:

We all fear the dreaded hard credit check. In fact, the entire refinancing process can feel quite invasive. Of course, you can always keep track of your own credit score, so you know where you stand.

Whenever you submit a loan application, lenders will check your credit. This will cause your credit score to take a temporary hit. However, the effect is minor (usually just 2 to 4 points per hard inquiry) and saving money from refinancing often outweighs the effect on your credit score.

Myth 6: You should only refinance if you want a lower monthly payment.

Why this myth is false:

For some, freeing up more of your budget monthly can make a huge impact on your quality of life and financial standing. Many people choose to refinance for reasons other than lower monthly payments. Here are some other common reasons homeowners choose to refinance their home loans:

• Consolidating debt: Credit card debt, unsubsidized and private student loans, and personal loans all come with high-interest rates. Many homeowners choose to refinance and cash out to repay other debts.
• Eliminate mortgage insurance payments: Some loans, including FHA loans, require the borrowers to pay mortgage insurance. This insurance usually runs .85% of the loan remainder, which can add up over the lifetime of a loan. By refinancing from an FHA loan to a conventional loan, many homeowners can free themselves of the additional insurance payment.
• Pay off the home sooner: Many people choose to take advantage of lower interest rates by increasing their monthly payments with a shorter loan lifetime term.
• Renovation: Cashing out and using equity to pay for upgrades to your home is an option. This can improve your quality of life and increase your home’s resale value. You could also use the money for other investment purposes.

Myth 7: Using your current lender is the best option.

You can refinance with your current lender, but you do not have to. You should always compare costs and interest rates between lenders to make an informed decision.

Why this myth is false:

There are pros and cons of refinancing with your current lender. While it can save you some time and paperwork, you may be able to find a better deal elsewhere. If you decide to refinance with your current lender, ask about special rates based on your existing payment history with them.

It’s also important to understand that even your current lender may need to fully vet you as if you were a new customer. This would include the entire underwriting process and associated fees.

Sometimes, switching loan institutions can lead to better deals, since the new lender will want to ‘woo you.’

Deciding Whether or Not to Refinance?

When it comes to refinancing, you want to consider your reasons and weigh all of your options. Talking to your mortgage lender first is the best step. They can give you a clear idea of your options and rates, so you can weigh all the factors.

Then you will want to calculate your break-even rate and analyze your goals. This can help you make an informed decision based on your lifestyle and future.

Do you have other questions about refinancing or are you ready to chat with a professional about your refinancing options? Options Financial’s team is here for you.