Despite the proliferation of free advice from expert mortgage advisors, borrowers still fall victim to a series of refinancing myths. As a result, only a small percentage of them enjoy the benefits of refinancing. To help homeowners make smarter financial decisions, below we explore the five most common refinancing myths.
Myth #1: Borrowers can’t refinance too soon after taking out a home loan.
A wise borrower will always be on the lookout for a mortgage with a lower interest rate. Regardless of when he finds one, he will be in luck because neither the State of Florida nor the federal regulations limit how soon homeowners can refinance their mortgages. For example, a borrower is perfectly within his legal rights to refinance right after he has signed his mortgage closing – though few lenders are likely to approve a refinancing application so soon.
Myth #2: Borrowers must have at least 20 percent equity in their homes.
One of the biggest refinancing myths is that borrowers need 20 percent equity to be considered for refinancing. While most lenders prefer applicants with 20 percent equity, many of them make available a variety of refinancing alternatives, regardless of the amount of equity borrowers have in their homes.
Myth #3: By refinancing, borrowers lose equity.
Many homeowners think that refinancing their mortgages will make them lose equity. Unless a borrower opts for a cash-out refinance, he won’t lose any equity in his home. In addition, all the payments made towards the principal of the previous mortgage will be reflected in a smaller mortgage principal when refinancing.
Myth #4: Borrowers should have a perfect score to refinance.
While a near-perfect FICO score can help borrowers get mortgages with better terms and conditions when refinancing, it isn’t a deal breaker. Even if the credit rating isn’t where it should be, a borrower may be approved to refinance his home loan as long as he has made a steady income and paid his bills on time. Usually, a low LTV ratio combined with a credit score above 620 will improve the chance of qualifying for refinancing.
Myth #5: When borrowers refinance, they’re much better off financially.
When it comes to refinancing myths, many borrowers believe that refinancing can bring them a series of benefits. But refinancing makes financial sense only in specific situations, such as:
- when a borrower gets a lower interest rate that will result in hefty savings over the lifespan of the loan, compared to the initial mortgage;
- when refinancing shortens the mortgage repayment period, allowing borrowers to free up cash for other investments;
- when a homeowner needs to reduce his monthly payment, so he can continue making payments on his mortgage;
- when a borrower intends to switch from an adjustable- to a fixed-rate mortgage to lock in the interest rate, especially if the rate drops to a record low.
Prior to starting the mortgage refinancing process, an applicant should know that there are several fees he might need to pay, such as application and appraisal fees, credit report fees, closing costs, private mortgage insurance, title insurance, etc. However, some lenders are willing to roll all these costs into the loan amount so that borrowers don’t have to pay anything upfront.
Refinancing a mortgage can be a difficult, daunting process. If you need an experienced and competent mortgage professional to guide you through the intricacies of refinancing your home loan, or you want to discuss the mortgage and refinancing alternatives we make available at North Florida Mortgage, our experts are waiting for your call at (904)-389-4635.