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Refinancing 101

Mortgage interest rates are the lowest in 35 years. Many homeowners eager to take advantage are taking steps to refinance, each with their own unique goals and needs. If you are considering your options, understanding the basics will help make your decision a smart and lucrative one. Whether you are looking to reduce your rate, shorten your loan term to 20, 15, or 10 years, or borrow extra money for home improvements, refinancing may be right for you.

When searching for refinance loans, do your homework by taking the time to research several loan options and lenders. Today effective refinancing can be accomplished even if only lowering your current mortgage loan rate by 1% to .75%. This is a deviation from former thought that refinancing wasn’t worthwhile unless you shed at least 2% from your rate. Extremely high priced homes, added competition, and the availability of online approval can all be accredited to the change.

Thinking about going with a mortgage broker? These days it’s fairly simple to do the legwork yourself and save on broker fees. Online rate shopping is easily accessible and painless. Most lenders have quick calculators and pre-approval applications on their websites, so that you can readily research the competition. The ample convenience of online pre-approval has managed to turn the once grueling and lengthy process of seeking loan approval into an easy application that can be complete in a matter of minutes. However, it doesn’t hurt to call around for rates as well, as you can pick up some helpful tips speaking to prospective lenders and get an idea of their closing costs up front. While shopping, be aware the rates advertised are often based on paying 1-2% origination points (discussed below). If you are seeking a no point loan, you’ll probably pay a bit higher. Lag time of up to three days before published rates are listed account for advertised rates being somewhat lower than the actual market rate that will apply to you.

Lock in verses float? Interest rates vary regularly with fluctuation of the market. Securing the lowest rate can be challenging. While you can’t predict or guarantee what rates will do, observing daily bond fluctuations are fairly reliable indicators of adjustments or possible trends. However, if you are concerned that rates are going to rise and are comfortable with your quote, it makes sense to lock in and relax. If you are the non-committal type, and opt to float, you are vulnerable to market changes and have up until five days prior to closing to lock in. If non-committal and passive, you will be automatically locked in at the market rate 5 days before you close.

With a refinance you are able to lock in within 45 days of closing. If you close on or before the rate lock expiration date your rate won’t change regardless of what happens with market. Many lenders offer a rate protection option to take advantage of declining rates and provide security that if the market increases, you are capped at a certain rate. Then, If rates drop, you have a “float down” option. While these offers seem tempting, you pay for the advantage of receiving a lower rate if they fall during the process. But, they often don’t drop enough in that short of a time period to make paying the extra fees worthwhile (usually have to drop a quarter of a point to make a difference).

Points, or loan-origination fees, will also impact your interest rate. A point is one percentage point of your loan amount. Lenders offer the opportunity to purchase points up front to lower your interest rate, which is simply a matter of trading out of pocket expenses in exchange for a higher loan amount/interest rate. In some cases, points are tax deductible. If you don’t intend on staying in your home for too long, it makes more sense to pay less up front costs, and take on a slightly higher rate.

Many borrow against the equity in their homes to make improvements or expansions. If you haven't built up much equity, up to 90 percent of your homes appraised value can be used for this purpose, subject to applicable state laws. A reappraisal of your property may be required.

Closing is the process of transferring ownership that begins weeks before the actual event, and seems to generate a lot of added fees to your refinancing. These costs make it really worthwhile to shop around and compare prices, and include items such as title insurance, processing fees, and appraisals, just to name a few. Sometimes you can roll them into the loan amount to reduce out of pocket expenses. To learn more about evaluating your options and what these costs are made up of see our related article, Understanding Your Closing Costs .

There’s no telling how long these advantageous mortgage rates will be this low, so if a refinance is in your future, now is a great time to start comparing lenders.

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