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By Maggie Tomasek
No matter how long you’ve been in your home, when mortgage interest rates are in the news, the thought of refinancing your mortgage will probably cross your mind. So how do you know if a mortgage rate refinance is the right move? Is it really worth it? Alliant’s mortgage experts helped us break down what factors you should consider and what you can expect when refinancing a mortgage.
It’s a smart move to have your mortgage broker or mortgage loan officer perform a refinance analysis periodically. Most reputable lenders provide this service at no cost, so you can review your options before making a decision.
Determine why you want to refinance your mortgage. Is it simply to get a lower payment? Are you looking to consolidate debts or undergo a home improvement project? Do you need a cash-out refinance for other big expenses like college tuition or a down payment on a second home?
When you’re looking at your options, you should also think about how long you plan on staying in your home. On average, Americans only a mortgage for eight years before refinancing or selling. If you plan to move in the next couple years, it might not be worth the hassle, and perhaps more importantly, you might not save any money. It also might make sense to switch from an adjustable-rate mortgage to a fixed-rate mortgage, or a new loan term could reduce your payments or shorten the length of your loan.
The old rule of thumb was that the refinance rate needed to be 2 percent lower than your current rate for a mortgage rate refinance to be worth it. Alliant’s mortgage experts say that standard has gone by the wayside because the average mortgage size has increased substantially over the years. So really, it’s a question of some simple math: how much money can you save each month with a mortgage rate refinance compared to the closing costs? For example, if you plan to be in your home for another 10 years and it will take you less than two years to recoup closing costs, you’re looking at significant savings. And, you can either pocket that savings, or apply it as a principle reduction to pay off your mortgage sooner.
Sometimes it makes sense to refinance a mortgage at a higher rate if you’re doing a consolidation loan. Why? Because those other debts – e.g. personal loans or credit card balances -- could have higher interest rates that are not tax deductible. (Check with your tax advisor regarding your individual situation.)
There are substantially fewer steps when you’re refinancing a mortgage vs. buying a new home. However, make sure you take into account various costs that could be associated with your mortgage rate refinance. These costs include the lender’s fee, plus third-party fees such as title policy, appraisal, flood certification, tax service and title closing.
Some lenders will roll those costs into the interest rate, so you pay for them over time rather than up front. Each lender will have different fees, so do your research and look for lenders who are transparent about the costs. Find a lender that will give you a mortgage rate refinance quote before having to give over all of your personal information.
After you’ve done your research and are ready to refinance your mortgage, the refinance process can take 45-60 days on average.
Once you have an understanding of why you want to refinance. It's important to shop around and get a few loan estimates. Loan estimates will provide the rates and fees associated with refinancing at that particular lender.
A good place to start your search is with your current lender. You can also work with the loan officer who helped you with the purchase of your home. Also, take a look at where you have other financial products and services like your savings account. If you already have a relationship with your traditional bank or credit union, they may be a comfortable place to refinance your home loan. (Yes, credit unions can refinance your mortgage - at a great rate too!)
Check out these other home and mortgage tips:
Maggie Tomasek is PR & Content Strategist at Alliant. She began her career as a journalist for newspapers in Utica, N.Y., Des Moines and Cincinnati before moving to Chicago in 2009. Maggie is an eight-time Chicago Marathon finisher and a lifelong creative writer with a passion for comedy. Her mom instilled in her a great sense of fiscal responsibility, and her big sister told her to throw that responsibility out the window every once in a while in the name of life experience. So far, that combination of financial advice has worked out pretty well for her.
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