Get a better understanding of the refinance process before you start calling up lenders.


While it seems like everyone is easily refinancing their home loans these days, refinance can actually be a muddy river to navigate. The more you know about the process ahead of time, the easier your journey will be.

Discover the truth behind these three myths ahead of time to make sure that you don't hit any hidden obstacles:

Myth #1: A refinanced mortgage is always cheaper than the original one.

While getting a better deal is usually the point of refinancing, you won't always find that a refinance always lowers your costs. Here's why:

  • Closing Costs: just as with your initial mortgage, you will need to pay closing costs. If you only plan to be in your house a few years, you may not break even.
  • Refinancing for a shorter term: some homeowners actually opt to make their monthly costs more by shortening the term of their mortgage. The plus is that there are less long-term finance costs and overall savings.

Myth #2: Adjustable Rate Mortgages should always be refinanced into fixed-rate mortgages.

This myth gets to the heart of a misunderstanding about ARMs. And really, you should educate yourself now if you have an ARM and don't understand how it works!

A few years ago many homeowners did get into trouble with ARMs that reset to much higher rates. These days, with the low overall interest rates, many ARMs are actually resetting to lower rates. In any sense, refinancing should not be a knee jerk reaction. Consult with a financial advisor before doing anything.

Myth #3: A refinance is just as easy to get as your first mortgage.

Many people think that just because they already qualified for one mortgage, it should be easy enough to qualify for a refinance.

If only this was true!

There are many factors that might make it harder to qualify for a refinance than your initial loan:

  • Underwriting guidelines have tightened up: with the financial crisis, banks are under even more pressure to make sure that borrowers are fully qualified. While you may have been able to skate by on your first mortgage, things will be tougher this time around.
  • Your financial situation may be different: If your credit has worsened or you don't have much equity in your home, you may also have trouble qualifying.
  • Your home's value may have declined: If your home is underwater (you owe more than your home is worth), it's going to be tough to get a new mortgage.

Everyone has a different reason for wanting to refinance their mortgage. Overall, people just want to lower their costs. Sometimes, though, in order to lower their short-term monthly payments, they end up costing themselves more money down the line either in finance charges or closing costs. Look at the overall, long-term aerial view of your refinance strategy to find your best route.

Breaking through these myths should make your journey easier. And sometimes, you might just find that staying right where you are is the best plan!

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Published on June 15, 2011