Setting The Record Straight
By Todd Hatfield
April 9, 2009
With President Obama’s foreclosure plan, and the recent passing of the economic stimulus package, many Utahns ought to consider refinancing their home loans. But, when it comes to refinancing, many consumers are confused about the process. When is a good time to refinance? How much is it going to cost? What are the fees? With tighter lending regulations, will I qualify for a refinance?
Below are some of the most common myths people have about refinancing:
Myth: I am moving in 1 to 5 years, I shouldn’t refinance.
The Truth: It depends on a variety of factors including your loan amount, how you are paying for closing costs and the reason for refinancing. If you want more equity in your home when you sell, then you should wait. If you want a lower monthly payment, then refinance.
Myth: The new interest rate has to be 1 to 2 percent lower than my current rate for refinancing to be worthwhile.
The Truth: There is no “rule of thumb” when it comes to refinancing. Whether it makes sense to refinance at a lower interest rate will depend upon the size of your mortgage and how long you plan to live in the home. For a large mortgage and a 10 year expected time in the loan, it might only take a .25 percent rate drop to make it worthwhile to refinance.
Myth: If I refinance, I will need to start all over again on our loan amortization.
The Truth: If you are smart, you won’t start over on your loan amortization. You can work with your loan officer to customize the terms of the loan. Many financial institutions offer 10-, 15-, 20-, 25- and 30-year loans. The rates will vary, so pick the loan that best meets your financial goals.
Myth: I just bought my house or refinanced six months ago, so now I need to wait at least a year.
The Truth: There is no magical waiting period. This is true whether you just bought your home or you recently refinanced.
Myth: I will need to pay a penalty fee for paying off my old mortgage.
The Truth: In some cases that could be true, but most of these types of loans are gone. Check your loan documents. If you have a standard conforming mortgage, it is unlikely that any kind of prepayment penalty will be involved. If you do have a penalty fee, check with your loan provider to see if they will waive the fee.
Myth: Instead of refinancing, it’s smarter for me to double up on my loan payments.
The Truth: Your best bet is to do both. By refinancing you can lower your payment and then pay extra on your loan whenever possible. It’s smart to make double payments when you can, but a lower interest rate is still better.
Myth: Too much paperwork is required and I won’t qualify for a loan under the tighter guidelines.
The Truth: You will be surprised at how little paperwork there is these days. The process is simple and your loan officer should be able to provide you the right paperwork. It is very important that consumers don’t let the new guidelines scare them from refinancing. Most of the new requirements were targeted at the down payment amount for first-time homebuyers, not for current homeowners who want to refinance. Under President Obama’s plan, homeowners facing foreclosure now have options when it comes to refinancing and relief on declining home values.
Myth: When I refinance, I should buy down points.
The Truth: Probably not, but a qualified loan officer should be able to determine if that is best for your situation and financial goals. It goes back to a time and cost factor. Look at available options first and have your loan officer calculate it out.
Myth: I can skip a payment if I refinance.
The Truth: This is a common misconception that people have when refinancing. You will only be able to defer your payment for a month. For example, say you close on January 15. At closing, you will pay interest on your loan from the 15th to the last day of the current month. When your new loan funds (usually the next day) interest will start to accumulate. Your new payment won’t be due until March 1, but will be for the principle and interest for February.
Myth: I can only refinance through my current lender.
The Truth: Not all loans are the same, so make sure you do your homework on what type of loan best fits your needs. It is very important that you work with a qualified loan officer who understands your situation and will help you meet your financial goals. Also, don’t exclude credit unions, they often have better rates than banks.
Myth: I should close at the end of the month.
The Truth: It depends on the type of loan you are paying off. If you are paying off a FHA loan, then yes, since those loans need to fund at the end of the month. If you are paying off any other type of loan, it doesn’t matter when you close.
Todd Hatfield is assistant vice president of mortgage services at Family First Federal Credit Union. Todd can be reached at 225-6080 ext.1603.