Myth #1: A Refinanced Mortgage is Always Less Expensive Than an Original Mortgage

The rule of thumb in real estate is not to refinance unless the new loan will end up costing less than the old one did. Most people who refinance do exactly the right thing – wait for interest rates to drop and get the best deal they can. There are some mistakes, however, that can make refinancing more expensive.

Borrowers need to be very aware of the closing costs during a refinancing. If the closing costs are high, and they roll them into the loan, they may very well end up paying more over the life of the loan than if they hadn’t refinanced.

Another risky move is called a cash-out refinancing. In a cash-out mortgage refinancing, the homeowner borrows the money he or she needs to pay off the original loan as well as extra money (equity in the home) to use for things like financing a child’s education, making necessary home repairs, or paying off credit cards. Since cash-out mortgages may be worth more than the original loan, they are frequently more expensive to pay off.

Myth #2: If You Qualified for an Original Mortgage, You Will Qualify for a Refinance

This used to be a given, but since the housing bubble burst, lenders have tightened their lending criteria. A FICO score that would once have made you a perfect customer may now make you persona non gratis. Before you apply to refinance your mortgage, it’s always a good idea to get a copy of your credit report to check for negative items like late payments, missed payments, write-offs, bankruptcies, etc.

If these items are on your credit report incorrectly, you can challenge them and have them removed. If the items are correct, however, there is little you can do but resolve to improve your credit score except to make better decisions in the future. If your credit score is low, you may need to work on credit repair for a year or two before you qualify for a refinance.

Myth #3: Always Refinance to a Fixed-Rate Mortgage

It is usually good advice to try to refinance to a fixed-rate mortgage. Over time, interest rates tend to increase, and monthly payments on adjustable-rate mortgages, or ARMs, may quickly become unmanageable. However, if you catch interest rates on a downward trend and plan to be in the house for only a few more years, you might save some money by refinancing with an ARM. This tactic is a gamble, however, and there is certainly no guarantee that it will pay off.
If you are considering refinancing your mortgage, speak to a financial advisor and look at all your options. You may be able to save yourself a considerable amount of money.