Myths of Mortgage ReFinancing
Myths of Mortgage ReFinancing
Myth #1 - Is it worth the hassle?
Have you been avoiding refinancing because of the stress it might add to your life? Stop worrying, the mortgages of 2008-2012 were vastly different from the mortgages of today. Getting approved for a mortgage is much simpler and considerably faster than it used to be. Nowadays, it’s easier to get a mortgage than it is to register your kid in preschool.
Myth #2 - Does refinancing make financial sense?
You may have friends or family that know all about home loans who have told you, “It doesn't make sense to refinance unless you're lowering your mortgage rate by one percentage point or more.” Or they might tell you it doesn't make sense to refinance if you're going to move before your loans hit its "breakeven" point.
The once rule-of-thumb to save at least one percent on your mortgage is a holdover from the 1950s when closing costs were big, loan sizes were small, and homeowners lived in their homes until their death.
Back then, when loan sizes were typically less than $60,000, a homeowner had to lower its mortgage rate at least one percent to save even as little as $1,000 annually. It was more common to have Mortgage Burning Parties than to refinance.
At today's loan sizes, the typical refinancing homeowner can save hundreds of dollars a month, maybe more with less than a one percentage point savings. Even a small interest rate reduction can result in substantial monthly savings. So long as costs are kept low, even a quarter-percentage point reduction can be worthwhile.
You do not need to save 1 percent - You only need to save enough to make it worthwhile.
Myth #3 – The much-touted No-Closing Cost Loan.
All mortgages cost money to create. Someone, somewhere, must pay those costs. So how are they recouped or covered? Your family and friends may be familiar with the "Break-Even Method" that many people talk about and it may cause you to have reservations about refinancing. Let us look at those reservations and see if we can ease your mind.
Using the Break-Even formula makes three huge assumptions:
- That you'll never want to refinance your home.
- That you'll never need to refinance your home.
- That you'll never sell your home.
With the way and the rate that the world changes, you more than likely will want to refinance sometime in the future. There are several reasons why; Mortgage rates could drop substantially again. Or maybe you'd like to take some cash-out for a home improvement project. Or you might want to diversify your assets and invest that money in other fun stuff.
With enough equity, you could eliminate your mortgage insurance payment. Saving even more money each month. ***
Switching from a 30-year to a 15-year mortgage could reduce your rates even more! Reducing your long-term interest payments means you could pay 64% less mortgage interest over the life of the loan. Assuming you plan to stay in the home forever. But many if not most people, do not stay in their homes forever.
A lower rate today that reduces your monthly payment could save you money until you sell and move to another home.
In which case, the costs are completely irrelevant! 3, 5, 7, even 10 years of monthly savings could mean a better lifestyle or a bigger nest egg or just peace of mind.
There are costs for getting a loan. Whether you plan to move up and out in a few years or you plan to host your own Mortgage Burning Party, there are only three ways to approach those costs.
- Pay them out of pocket, using your cash.
- Borrow the money and roll it into the loan, a slightly larger loan.
- Pay a fraction of a percentage point more interest in exchange for the bank paying the costs.
These are called “No-Cost Loans” even though there is obviously a cost…
Myth #4 – What if interest rates go lower?
Just three weeks ago we would have not believed it. But we were wrong. People are notoriously terrible at predicting the future of mortgage rates. Mortgage rates can go lower. Wall Street is unpredictable. And your financial situation could
change. Nothing is predictable.
Just remember that every month of waiting is another month of not saving, another month of fretting about missing out, and another month in which the rates could go even higher.
So how do you know if now is a good time to refinance?
Without costs to worry about, rates hovering below 3%, and the feds pumping money into the economy, it has never been easier or less expensive to get a home loan.
Can the rates go lower? Sure they can, but seriously, they are not going to go to zero. Why create more anxiety than you need to? A penny saved is a penny earned!
Simply put, when November comes and the election is over, the Feds are going to stop buying bonds and the price of bonds will go down. When bond prices go down, interest rates go up. Including home mortgage rates. Should you refinance before they get higher? Maybe.
But please do not listen to well-meaning friends or family. There are many factors to consider and you need expert advice. In the end, all you want to do is save money - Easily, Safely, and Funly.
We can help.
Call us and we’ll guide you to a decision.
No charge and no commitment!
And if it’s not going to save you money, we’ll tell you.
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*** Why Should You Refinance?
- To save money! Refinancing at a lower rate will make your monthly payment smaller.
- To avoid an ARM adjustment. Locking in a low rate today means your payment will not change in the future.
- To get cash out of a house with lots of equity.
- To consolidate two mortgages into one with a lower rate.
- To stop paying Mortgage Insurance. If your home has appreciated enough to earn you 20% equity, you may be able to stop paying insurance.
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