Should I refinance my mortgage? By Suze Orman

A lot of you are thinking about refinancing right now, even more than buying homes. Yet, I've noticed that people are becoming concerned about the rising interest rates and are pulling back, saying they’re going to hold off on refinancing.

Before deciding not to refinance, I want you to really think about it, because the long-term savings may still be worth it. I really want you to think about if it makes sense for you to pay the costs, or if it does not. 

How much does it cost to refinance a mortgage?

It costs money to save money when it comes to refinancing. The costs associated with refinancing include:

• Closing costs, which often range anywhere from 2% to 6% of the amount of money that you are borrowing. These costs include things like loan origination fees, underwriting fees, appraisals, and so on. We’ll dive more into these types of fees below. When you refinance a home, a lot of times they ask if you want to roll those closing costs into your new mortgage. But you have to think, does it make sense to do that or not?

• Application fees cost about $500. If you have a mortgage company that's charging you an application fee, that would be a mortgage company that I would not do business with, because that is not required.
• Appraisal fees are assessed when someone is sent out to determine how much the home is worth. Expect to pay anywhere from $500 to $750, but if you're in a rural area, they can even be as high as $1,000.
• Origination fees can cost anywhere from 1% to 1.5%. This is the cost a mortgage company will charge for processing your home loan.
• Title insurance and search fees allow you to find out if there are any liens against the house, and if a loan can be taken out on the home in just your name. This costs between $500 to $800.
• Inspection fees will cost you a few hundred dollars and will ensure that the house is in good shape.
• Recording fees help pay for all the paperwork that needs to be done.

So very easily, it can be between 2% to 6% of your loan amount.

Should you roll your closing costs into your mortgage?

Let's just look at the numbers with a $250,000 mortgage and $7,500 in closing costs. Should you roll this $7,500 into the mortgage so that it would be $257,500? Or should you pay that $7,500 up front? Which one should you do?

Most likely, very few of you have the extra money to pay the closing costs upfront, because normally you refinance because you need to reduce your monthly mortgage payment.  So, you say I'm going to roll the closing costs into the mortgage.

In this particular case, if you rolled $7,500 into your refinanced mortgage, it would just cost you $32 more per month, that is all. Yet, if you pay that over a 30-year period of time, that's going to turn into $11,520. That's the real cost after that 30-year loan term.

In most cases, I would advise against rolling your closing costs into your mortgage. However, there are instances where it may make sense depending on how long you plan to stay in the home.

Is refinancing your mortgage right for you?

Refinancing your original mortgage is right for you when can check off all three of these: if:

• Your refinance rate will be lower than your initial interest rate
• You can decrease your loan to a shorter term or break even on the time left paying your current mortgage
• And you're planning to keep the house long enough for your monthly savings to recoup the upfront cost to refinance

If refinancing is what it costs you to save money, and possibly shorten the term of your mortgage, I would absolutely go ahead and do it now.

However, it does not pay to refinance your home when:

• You have 25 years left on a 30-year mortgage and you refinance back to another 30-year mortgage.
• You plan to sell the home within a few years of refinancing
• You have been offered a no-cost refinance. If you're refinancing your current loan, and there is no cost to do so, you're instead paying for it in a higher interest rate. If you’re getting a no-cost mortgage, just ask your mortgage broker: If I were to pay the costs upfront, what would the interest rate be versus a no-cost mortgage?

Please, do your research and ask questions, before deciding that refinancing your house is in the best interest for you and your family.

Check out these other loan refinance tips from Alliant:

• Which types of loans make sense to refinance?
• Mortgage rate refinance: when you should do it and how it works
• Should you refinance your auto loan?

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