Refinancing a mortgage can provide lots of advantages for homeowners. They can lock in a lower interest rate or shorten the term of their loan that can help them save thousands of dollars in their monthly mortgage payments. However, there are still lots of confusion about the refinancing process that hinder them from reaping its benefits. If youâre one of those who have been contemplating if youâll jump at the opportunity, we debunk the most common refinancing misconceptions to help you decide whether it is a smart choice for you.
âIâm afraid I wonât qualify.â
While there are specific eligibility requirements, many homeowners do qualify for a refinance. Even those who havenât built up a lot of equity in their homes or are struggling to get their credit back on track might qualify. The guidelines have now loosened up that homeowners who thought they couldnât refinance before because of credit or employment issues just need to approach a lender to know the process. Donât let your âlow financial self-esteemâ stop you before you even get started.
For an instance, government programs such as the Home Affordable Refinancing Program or HARP can help you refinance as long as Fannie Mae or Freddie Mac own your loan; it was originated on or before May 31, 2009, and your current loan-to-value ratio is greater than 80%.
âThereâs no reason for me to refinance.â
Believe it or not, there are many reasons for you to refinance. The primary reason for many homeowners is to have a lower mortgage rate, which leads to lower monthly payments. Itâs also applicable if you want to shorten the life of your loan and save money in interest paid over the life of the loan. Refinancing is also possible for those who have an adjustable-rate mortgage (ARM) and now want to have a low fixed-rate. Homeowners who are planning to stay in their homes for a while can also refinance to fund home repairs and other major purchases.
âIt will take too much time and effort.â
Sometimes just the thought of providing the paperwork can be the most daunting part of any real estate transaction. Refinancing is no exception. Many homeowners may find it a burden to provide the documents needed, including pay stubs, tax returns and proof of income (W-2 forms and/or 1099s), credit report, statement of assets and debts, and even title insurance. But if you will think about it, you can easily access most of these requirements anyway if youâve safely stored them for verification.
If you really cannot locate your copies of those documents and/or youâve lost them at some point, you can still find that refinancing is worth the hassle. Streamlined refinancing is being offered for homeowners who have government-backed loans such as the FHA, VA or USDA loans. Itâs an option that can save them time and money by expediting the refinance process. If you apply for a streamline refinance to simply reduce your interest rate, there may not be a need for a new appraisal or an income verification.
Just remember that while it might not be the case for most conventional loans, the extra time and paperwork can be worth it when you eventually see your monthly payments come down and finally save more cash.
âI canât refinance with another lender.â
Refinancing is a great opportunity for you to search and compare lenders and mortgage rates so it’s a great opportunity to get a better deal with a new lender. Itâs also important to shop around and compare loan options from different types of lenders, such as from a local bank, an online lender, or a mortgage banker. You can also venture out of your town or county when seeking lenders.
âShop around for rates, and donât rely on banks in your area,” said Bryan Marsden, editorial coordinator of FatWallet.com.
âIâm waiting for mortgage rates to drop.â
This is a common misconception that most homeowners have about refinancing. Yes, refinancing when mortgage rates are low can be a very smart decision. And yet, thereâs no way to know when rates will go lower so itâs quite a gamble to wait every day for it to drop. Opt to refinance depending on your situation, your goals, and whether it makes sense for you.
âIâve missed my chance to refinance.â
And speaking of waiting for the ârightâ time, many homeowners think they might have missed their chance to refinance because of rising interest rates. However, experts are saying otherwise. As long as youâre sure on the costs associated with refinancing and confirm that it will lower your monthly payments, itâll be an appropriate choice for you regardless.
If you think you are moving soon, a refinance isnât a smart move because you may not recoup the closing costs you spent to save cash on your mortgage payment. Experts recommend that you look for the break-even point of the loanâyour total closing costs divided by monthly savingsâwhere youâll start saving money in your mortgage payments.
Bottom Line
Refinancing may sound complex and overwhelming, but once you know what youâre getting into, youâll understand that itâs a great opportunity for you to save some serious cash before itâs too late. Remember to choose the right refinancing product depending on your time frame, goals, and plans.
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