Interest rates hit historic lows with the financial crash of 2008, and they've stayed low since then. These historically low rates have inspired many Americans to refinance their mortgages, but before you sign on the dotted line it's important to separate the facts from the fiction.
Changes to the Home Affordable Refinance Program (HARP) introduced in late 2011 have made it even easier for Americans to refinance their mortgages. The biggest difference between the original HARP and HARP 2.0 is that the new model allows unlimited loan-to-value on a refinanced home. This means that millions of Americans who were not eligible for refinancing in the past now qualify, so if you're interested, it's certainly worth trying again.
It's true that ideally lenders would love all applicants to have at least 20 percent equity in their homes. However, HARP was created to assist homeowners with less equity refinance. With the introduction of HARP 2.0, it's possible to refinance your home without any equity at all.
This one is a half-truth, rather than a complete myth. It comes because generally people pay out of pocket for things like closing costs, application fees, title insurance, and appraisals. You don't need a lot of cash on hand though if you have enough equity to satisfy a lender that you're a good risk. This amount varies from lender to lender. If you don't have the cash to cover these up-front expenses, your lender may be happy to roll the costs into the loan.
It's true that the current interest rates are set by the Federal Reserve Bank. However, that doesn't mean that all mortgage financing deals are created equally. Fees vary from lender to lender, and some mortgage providers even build fees into the interest rate. Then there are closing costs and extras like loan points to consider. The only way to find the best mortgage refinancing deal is to shop around and compare a range of lenders.
Refinancing isn't the best option for everyone, but it can help significantly reduce your monthly mortgage repayments. The myth persists because there are a number of costs associated with establishing a new loan, including mortgage broker fees, credit reports, home appraisals, and title insurance.
You may also only receive a low interest rate for a honeymoon period before it reverts to a much higher rate. Even if you've got a fixed interest rate better than your current rate, it still may not be low enough to outweigh the additional financial costs of refinancing. Money experts suggest that borrowers should look for interest rates at least 1.5 to two percentage points lower than their current rate to consider refinancing. Remember that if your credit has taken a dive, you also won't be offered the low interest rates that good credit risks receive.
Refinancing also isn't smart if you're not planning to stay in your home in the long-term, as you'll probably pay the fees without sticking around long enough to take advantage of the low interest rates. It's important to take a look at the big financial picture before you decide whether refinancing is a good idea for you or not.
Myths about mortgage refinancing abound, so it's important to learn the true story before you join the thousands taking advantage of historically low interest rates.