Busting Refinancing Myths:

Refinancing sounds simple: you replace your old loan with a new one. But don’t let the simplicity fool you—there’s a lot more going on behind the scenes. Sure, lowering your interest rate and cutting your monthly payment sound great, but you have to be intentional. If you rush into a decision like this without thinking things through or running the numbers, you could end up further from your goals.

We’re gonna get super clear on how refinancing really works and how to make it a powerful tool in your financial toolkit. When done thoughtfully, it can be a game-changer for your financial future—but only if you approach it with a solid plan and the right team in place.

Let’s start with understanding the two types of refinancing: 

1. Rate-and-Term Refinancing (aka a traditional refinance or no-cash-out refinance)

Rate-and-term refinancing is when you replace your existing loan with a new one, typically to secure a lower interest rate or adjust the loan term. The primary goal of this type of refinancing is to (1) reduce the monthly payment or (2) pay off the loan faster. This type of refinancing simply changes the terms of the original loan.

2. Cash-Out Refinancing

Cash-out refinancing is a more complex refinancing option. It allows homeowners to refinance their mortgage for more than the current loan balance and receive the difference in cash (ie: your home is basically collateral for the new loan). This type of refinancing involves replacing the existing mortgage with a new, larger one, based on the amount of equity built up in the property. The additional funds are provided to the homeowner in the form of a lump sum, while the new loan takes on the increased balance. 

We won’t be going over cash-out refinancing in this blog. Instead, we’ll bust 5 myths related to rate-and-term refinancing so you know your options and can make the best decision for YOU and your financial future. 

Let’s dive in, shall we??

Myth 1: By utilizing rate-and-term refinancing, I will have more money to put toward high interest debt (credit cards, personal loans, student loans, etc)

Rate-and-term refinancing can definitely help you save money or lower your monthly payments, but it’s not a cure-all for deeper financial issues like overspending, lack of budgeting, or high-interest debt that keeps creeping back.

Refinancing your home or your car might make your other, high interest debt feel more manageable in the short term, but unless you address the root cause of why you’re struggling, it’s just a band-aid. It’s not going to magically wipe out your debt or fix poor spending habits. 

The Power Move: Don’t view refinancing as a quick fix. It’s a tool to optimize your finances, but you still need a strong foundation—like budgeting, saving, and intentional spending—for real, lasting change. Don’t know where to start? Reach out today to chat with one of our coaches. 

Myth 2: I’ll save a TON of money by refinancing 

It’s easy to assume that refinancing means big savings across the board. But let’s break it down: If you’re refinancing into a new, longer loan term, there are a number of associated costs: (1) loan origination fees, (2) appraisal fees, (3) closing costs, and a (4) credit report fee, to name a few. These fees can vary lender to lender and on average equal 2-5% of the total loan amount. 

I’m going to break down the numbers for you: let’s say I have a home with a 

$300,000 mortgage at a 7% interest rate and a 30 year term. 

My current monthly payment is ~$1,996. 

I want to refinance to a 5.5% interest rate and roll the refinancing fees into the new mortgage. 

I want to know, how long would it take to see my monthly payment decrease and when would I break even (the "break-even" point referring to the time it takes for the cumulative savings from my reduced monthly payment to equal the refinancing costs). 

If I refinance to a 5.5% interest rate and roll the refinancing fees into the new mortgage (~$5K), my new monthly payment would be approximately $1,731.76.

This means I would immediately save about $264.15 each month right away, BUT it would take around 19 months for those monthly savings to cover the cost of the refinancing fees—ie, to break even.

This example uses a lower refinancing fee percentage; if I had a higher cost to refinance, that timeline could be anywhere from 24-72 months. 

The biggest takeaway here: you HAVE to look at the full picture and run the numbers. How long will it take you to break even? What’s the total interest cost over the life of the loan? Refinancing is more than just about what you’ll save in the next few months—it’s about what makes sense for your financial future.

The Power Move: Calculate the long-term cost of refinancing. Here are some great questions to answer. 

1. How does a lower monthly payment now compare to how much interest you’re paying over time? 
2. How do refinancing fees affect your timeline? 

Short-term savings are great, but only if they don’t cost you in the long run. These are great conversations to have with a trusted lender and/or financial advisor, who can help you weigh the short and long term risks of refinancing for your individual situation. 

Myth 3: My credit score is bad, I can’t refinance. 

People assume that unless their credit score is flawless, refinancing is out of the question. We hear this all the time, and it’s simply not true. Yes, your credit score has an impact on your interest rate and terms, but a lower credit score doesn’t mean refinancing is out of the question. 

Let’s assume two homeowners—Person A and Person B—are both looking to refinance their $300,000 mortgage, currently sitting at a 7% interest rate. The initial monthly payment for both is ~$1,996 and the total interest paid over 30 years (before refinancing) would be ~$418,526.

Both are aiming to refinance for a 30-year term, but they have different credit scores:

• Person A’s Credit Score: 780 (excellent)
• Person B’s Credit Score: 650 (fair)

Person A: Excellent Credit Score (780)

Because Person A has a higher credit score, lenders see them as a lower-risk borrower. This could help them qualify for a lower interest rate; let’s say 4.5%. Here’s what that means for their new loan:

• Loan amount: $300,000
• Interest rate: 4.5%
• Monthly payment: $1,520.06
• Total interest paid over 30 years: $247,220

Person B: Fair Credit Score (650)

Person B, with a credit score of 650, is considered a moderate risk to lenders. While they can still refinance, they’re offered a rate of 5.5%. Here’s how that affects their loan:

• Loan amount: $300,000
• Interest rate: 5.5%
• Monthly payment: $1,703.37
• Total interest paid over 30 years: $313,213

You can see how Person A and Person B would save money on the monthly payment & total interest by refinancing, and also how their credit score at the time of refinaicng can shift those numbers. 

The Power Move: Even if your credit isn’t where you want it to be, refinancing is still on the table. Plus, it’s important to remember that interest rate adjustments don’t move quickly; we are experiencing cuts in 2024, and based off historical reactions to interest rates dropping, we might see cuts again later this year. Which means you have time to improve your credit score AND still benefit from a refinance at a later date. Six months of using a secured credit card, for example, can do wonders for your credit score. We also recommend running a credit report to ensure there is no fraud on your accounts, which you can do for free here. 

Myth 4: Refinancing Fees Will Eat Up My Savings

Yes, there are fees involved when you refinance—closing costs, application fees, appraisal costs—but that doesn’t mean refinancing won’t save you money. The key is understanding your break-even point: how long it will take for your monthly savings to outweigh those upfront costs.

Sometimes, you can roll the fees into your loan, which spreads them out over time. And when refinancing results in significant interest savings, those fees can feel like a small price to pay.

The Power Move: Understand the fees upfront and calculate when you’ll break even. If you’re saving more than you’re spending, the fees are just part of the investment in your financial future.

Myth 5: I Can Only Refinance Once

Some people think once they’ve refinanced, that’s it—they’ve missed the chance for any further savings. Not true. You can refinance multiple times as your financial situation improves or interest rates drop again.

I actually have a family member who refinanced almost two dozen times in the last 40 years!

That being said, refinancing too often can rack up fees and paperwork. But if you’re strategic, refinancing more than once can be a smart way to keep optimizing your financial situation as life evolves.

The Power Move: Think of refinancing as a part of your long-term financial strategy. If it makes sense to refinance again, go for it. Just make sure each time you refinance, you’ve already paid off the fees and costs from the last time. 

What else can I refinance?

Home mortgage refinancing gets a lot of attention, but you can also refinance student loans, car loans, and personal loans. If you’re dealing with high-interest debt, refinancing can give you more control, lower your interest rate, or adjust your repayment timeline.

In summary, here’s why you might want to refinance:

• Lower Monthly Payments: Refinancing at a lower interest rate frees up cash flow, giving you more breathing room in your budget to save, invest, or tackle other financial goals.
• Save on Interest: By securing a lower rate, you can reduce the total amount of interest you’ll pay over the life of the loan, potentially saving you tens of thousands of dollars.
• Shorten Your Loan Term: Refinancing can help you cut down on years of payments, allowing you to build equity faster and own your home outright sooner.
• Lock in Stability: If you’re dealing with an adjustable-rate mortgage (ARM), refinancing into a fixed-rate loan can provide financial stability by locking in a consistent payment.

Annnnd here’s why you might NOT want to refinance:

• High Upfront Costs: The fees involved in refinancing (2-5% of the loan amount) can take years to recoup, so if you’re planning to sell or move soon, it may not be worth it.
• Extending Your Loan: Lowering your monthly payment sounds great, but if it means extending the loan term, you could end up paying more in total interest over time.
• Minimal Rate Reduction: If the difference between your current rate and the new rate is small, the savings may not be enough to justify the refinancing fees and effort.
• Already Close to Paying Off: If you’re nearing the end of your loan term, the costs and time associated with refinancing may outweigh any potential benefits.

Refinancing is a major financial decision, and having the right financial team in place ensures you make informed, strategic choices. From finding the best rates to understanding the long-term impact on your finances, a team of experts helps you see the full picture. 

This includes: 

• ​​A lender or broker: they will help you find the best interest rates and loan terms that align with your financial goals and guide you through the application process.
• Financial planner: helps you see the big picture. They ensure refinancing makes sense for your long-term financial strategy, helping you weigh the costs, benefits, and potential savings so you don’t just react to lower rates but move with purpose.
• Budget coach: helps you make sure refinancing fits into your broader financial strategy by analyzing how it impacts your monthly cash flow and mid to long-term goals. They guide you in using any savings from refinancing wisely—whether it's paying down debt, building wealth, or reaching other financial milestones, all while keeping you accountable to your financial plan.
• Real Estate Attorney (if required): In some states, a real estate attorney may be required to review the loan documents and ensure everything is legally sound. They help protect your interests and make sure there are no hidden risks in the terms of the new loan.

Remember: When it comes to refinancing, it’s all about playing the long game. Sure, lowering your interest rate can be a huge win, but never, ever use your home’s equity (aka, cash-out refinancing) to pay off debt or cover college costs. NEVER EVER!!! That’s betting on the future—and your home is the last thing you want to gamble with. If the unexpected happens—a job loss or a market crash—you don’t want to be left without the thing that literally puts a roof over your head. 

Always run the numbers: calculate how long it will take to break even and whether the savings are really worth it. And before you make any moves, sit down with your financial team to ensure refinancing is part of a bigger, smarter strategy that sets you up for success.