With interest rates at record lows, millions of homeowners are now finding themselves considering a refinance. And if mortgage rates continue to decline, even more homeowners will have a chance to save on their current mortgage by refinancing into a lower rate.
There are many questions and misconceptions when it comes to refinancing, so we tapped the expertise of Cincinnati-based Ron Erdmann at Guaranteed Rate for some mortgage refi myth busting.
Myth 1: Closing Costs are Expensive
Depending on the amount of your loan, the value of your property, and your lender, you may not have to pay any closing costs out of pocket. “There are alternatives not everyone is aware of,” Erdmann says. “One option is to roll your closing costs into your new mortgage loan, which you can then pay off through your monthly payments. Some lenders can waive fees like lender’s title insurance and the appraisal fee, which will result in immediate savings. Other options come with substantial credits off of closing fees, which can also result in an immediate benefit. You’ll want to talk with a highly recommended mortgage lender about these options.”
Myth 2: I Shouldn’t Refinance Because I Might be Moving Soon
Possibly moving or selling sometime soon? Erdmann says that’s not a problem either. “Many people think it’ll take three years to break even with the cost of a refinance,” he explains, “but I find that many of the clients that I talk with will recoup the fees in well under a year. So even if someone decides to move a year from now, they will still have savings. If someone is looking to move in the foreseeable future, then it’s even more important to talk with a trusted mortgage professional because we can offer solutions and can help the client plan for the move. Clients don’t always think about key questions like, ‘How will refinancing now affect my ability to buy the next house?’”
Myth 3: If I Refinance, I’m Just Adding More Years onto my Mortgage
If you’re concerned that a refinance will push back your payment timeline, Erdmann says that’s not the case. “If you took out a 30 year loan three years ago, you don’t have to do a new 30 year loan. You can do a 27 year loan or a 20 year loan or a 15 year loan. If you are worried about increasing your payment, then you can always do a new 30 year loan but make extra payments. The net effect is that you will have a lower required payment, but you will still have substantial interest savings that you can use to prepay your loan even faster than you would otherwise.
Myth 4: You Can Only Refinance Your Mortgage Once
Erdmann says there’s no limit to how many times you can refinance your mortgage. “Average 30 year fixed rates in Dec 2018 were 4.9%. When average rates dropped 0.5%, then we refinanced clients with minimal fees that resulted in immediate savings,” he explains. “When rates dropped another 0.5%, then we refinanced a lot of our clients again. There is no downside to refinancing as long as you’re doing an accurate cost vs savings analysis.”
For example, if a client has a $400k loan, and if they save 0.75% per year in rate, then they are saving $3,000 the first year in mortgage interest. “If it only costs $2,000 to refinance, then the refinance was a ‘win’ as long as they had the loan for at least eight months,” Erdmann says.
Myth 5: I’ll Have to Sign Paperwork In-Person
With many people taking extra precautions due to COVID and limiting contact to only essential activities, they may feel uncomfortable coming to an office to sign closing documents to refinance their mortgage. Erdmann says new technology protocols allow for a fully electronic way to sign documents.
To learn more about Ron Erdmann, NMLS 728342, Branch Manager and SVP of Mortgage Lending at Guaranteed Rate, visit https://www.rate.com/loan-