Three Common Myths about Refinancing Your Mortgage

Three Common Myths about Refinancing Your Mortgage

For millions of homeowners, refinancing has helped them save thousands of dollars and pay off their home sooner. But is it the best option for your situation?

If you have been considering refinancing your mortgage, there are many advantages to doing so. Perhaps you are in a better financial position now than you were when you bought your home. You can pay down some of your mortgage and refinance the new balance. Or maybe your credit score is better now than it was a few years ago. You may qualify for a lower rate which could reduce the amount you pay in the long run on your mortgage. There are many good reasons to refinance your home, but there are also some misconceptions that people have about refinancing. Here are three of those myths and the truth to go along with it.

Myth #1: You should always switch your adjustable rate mortgage to a fixed rate when you refinance.
Many home owners buy into this myth because they simply do not understand the ins and outs of an adjustable rate mortgage. If you have an ARM, it doesn’t always benefit you to switch over to a fixed rate when you decide to refinance your home.

Everybody knows the trouble that occurred in recent years with ARMs, but those troubles happened because those mortgage reset to higher rates. With the historically low rates that we have today, the mortgage rates are resetting to lower rates which means savings for thousands of homeowners who have adjustable rate mortgages. You should never make the decision to switch to a fixed rate because of an impulse. Always check with a trusted financial advisor before making this type of decision.

Myth #2: Refinancing a mortgage means lower costs and monthly payments.
In general, refinancing your mortgage will give you a better bargain on the remaining portion of your mortgage, especially when rates are at a historic low point. However, this isn’t always the case. You have to consider closing costs when you refinance which could nullify any savings you will experience with a refinance.

You may also choose a shorter term when you refinance. If you currently have a 30 year mortgage, you might decide to switch to a 15 year which would essentially mean higher payments each month. But, of course, this means paying less in interest by the time you have your mortgage loan paid off.

Myth #3: A refinance helps you get out of your first mortgage easily.
In many cases, it may be more difficult to qualify for a refinance than it is for a regular mortgage loan. Since the housing crisis, underwriting guidelines have stiffened and banks are trying to weed out borrowers who are not fully qualified more aggressively than ever before. For home owners who are in a worse financial situation than they were when they first bought their home, it will be more difficult to get a mortgage as well.

But one of the most important factors that could keep you from qualifying for a refinance is that your home’s value probably dropped since the time when you bought it. If you currently owe more on your home than what it is worth, you’re going to have a difficult time refinancing it these days.

Of course, you should always check with a trusted advisor before making your decision to refinance or to not refinance. Every situation is different so you may not even need to worry about these myths. A few minutes of research and asking questions could bring you a much better deal for refinancing your home than you have ever considered.

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