2% rule of thumb in refinance

Guest

I am about to refinance for the first time. In the process I heard the term 2% rule. What is it actually?

Samantha · Posted: Sat Dec 10, 2005 5:03 pm Post subject:

Hi Brenda,

2-percent rule is a thumb rule to determine whether it is going to be a good decision from financial side to refinance the mortgage.

As per this rule, if your rate on the mortgage is reduced by at least 2% then only you should refinance to get a benefit.

God bless you.

For MortgageFit,
Samantha

jerry · Posted: Sun Dec 11, 2005 8:35 pm Post subject: RE

Hi,

Experts suggest a 2-2-2 rule of thumb to determine whether or not refinancing would pay off. Refinancing would make sense if you have stayed in your house for 2 years, planning to stay there for another 2 years and the new rate is 2 points lower than your mortgage rates at present. This formula may not apply always because even a drop of 1% point from the present rate will make the refinancing attractive.

According to banking sources when the earning potential of your assets are more than the cost of financing, then you should consider a mortgage that minimizes your monthly payment. This way you can increase your cash flow for investing. It will be a mistake if you automatically refinance with your existing lender without considering other. So it is advisable that you discuss your alternative with a mortgage advisor.

Thanks,
Jerry

Posted: Mon Nov 24, 2008 2:42 pm Post subject:

I am refinancing at 1% point lower. Rates won't be 2% for me, unless some miracle happens! I am saving $150 a month on my mortgage. To me its worth it.

jameshogg · Posted: Tue Nov 25, 2008 12:14 am Post subject:

Hi Guest!

Has the lender agreed to refinance the loan? Consult with the lender and check out whether you will face any issues later on or not.

Thanks

Guest

The 2% rule was constantly discussed in 1985 whe I started in the mortgage business. Back then the maximum conforming loan was about $90,000. With mortgage amounts that low, the rate had to be 2% or more lower than the current rate to "break even on the costs" in 2 to 3 years. Now the maximum conforimg loan is $417,000. When mortgages are larger, it does not take a lesser rate of 2% to "break even on the costs".
In this day and age, I usually calculate how much the monthly payment needs to drop to break even in 2 to 3 years. On large loans, that could be a rate drop of .50%. Usually the break even point on costs is a drop in monthly payment of about $125. If your payment is dropping $150 a month, you are probably breaking even in 24 months or less. Today is Nov 25 and rates dropped dramatically today. You should be able to get a better rate today and break even faster than 24 months.

steve2 · Posted: Wed Nov 26, 2008 1:56 pm Post subject:

The easiest way to compare is to take the cost of refinancing (closing costs on a good faith estimate, not escrows and prepaids), then divide that by the amount of money you will save on your monthly payment. This will show you how long it will take to break even.

Example: If it costs you $3000 to refinance a loan that will save you $300 per month, you can break even after 10 months - smart! If it costs you $10,000 to refinance a loan that will save you $100 per month, it will take you 100 months to break even - not smart.

banker0679 · Posted: Sat Nov 29, 2008 12:48 pm Post subject:

Are you speaking about the benefits of the 2% rule or the 2% limited cashout available to you?

Guest

I have a 70000 mortgage at 5.375. I have seen an offer for 4.2% with 2 points up front. Is this worth refinancing?

Posted: Fri Feb 27, 2009 10:05 pm Post subject:

You should refinance only if you are planning to stay in the property for next couple of years. Otherwise, it wouldn't be reasonable to refinance the property. If you want to stay in the property, go ahead with the refinance option.

gmakerley · Posted: Tue Mar 03, 2009 12:16 pm Post subject:

dougie, you need to make a calculation to tell you how long it will take you to recoup the costs (2%) of your refinance. two points isn't a whole lot of money in comparison, but your savings on monthly payments will tell you a lot.

Guest

I have a mortgage rate of 6.25% on a 204000 house for 30 years. Does it make sense to refinance to a 5.2% or a 4.75%? I am an elderly person and don't know how long I can stay in the house.

Guest

I have a mortgage rate of 6.25% on a 204000 house for 30 years. Does it make sense to refinance to a 5.2% or a 4.75%? I am an elderly person and don't know how long I can stay in the house.

arya310706 · Joined: 29 Jul 2009 Posts: 48 0.09 Dollars($)

2% rule is benefited for getting benefit of 2% while refinancing.
One should consult with lender

ashleyblanton · Posted: Wed Aug 05, 2009 10:47 am Post subject:

Exactly what Steve said. You loan can stay at the same interest rate, but you are paying off debt, then your saving monthly can quickly outweigh the cost of the loan.

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