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What to consider when thinking about refinancing your home

The old adage of "you have to live in your home for five more years to make it worth it" doesn't apply with today's rates.

GRAND RAPIDS, Mich. — The housing market remains hot across West Michigan. And with mortgage rates still low, some of you may be wondering if it would save money to refinance.

Let's take a look at some of the key factors to consider – in this week's Money Guide.   

You may have heard the old adage that you shouldn't refinance your home unless you plan to live there another five years.

Today, that is simply not true. It all depends on the interest rate of your original loan and where rates stand now.

"If you are able to better your interest rate by about a half a percent, you will break even in under 4 years and you will save yourself some money each and every month," explained Lake Michigan Credit Union's Zach Tebos. 

"Approximately every 8th of a percent that you can save off your loan, you are going to save 13 to 14 dollars per month. If you can save a full percent, then you are going to break even in about 2 years and that is a no brainer. With rates what they were in 2018, 2019, you should be able to do that," explained Zach.

"Break even" means you will have re-couped the closing costs that come with refinancing, which is typically $2,000 to $2500 depending on the size of the loan and if a new appraisal is required. In many cases, it isn't.

Another important factor: your mortgage term. You can save thousands by dropping from a 30 year to a 20 or even 15 year mortgage when you refinance. Remember, the longer the term, the more interest you are paying each month.

But don't drag your feet if you want to refinance. Zach says time is of the essence.

"The Mortgage Banker Association is projecting rates to go up to about 4 percent sometime in 2022, we don't know exactly when, but they are expected to go up," explained Zach.

Two more things to think about: refinancing might enable you to drop the Private Mortgage Insurance (PMI) that may have been required with your original loan.

And depending on how much principal you've paid down, pulling money out at this lower interest rate to pay down debt with a higher rate could be very wise.

Bottom line, now is a great time to have this conversation with a local mortgage lender. They can help you determine whether or not refinancing would be beneficial for you.

Lake Michigan Credit Union has a refinancing calculator on their website, visit it here.

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