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

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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.

Like | Dislike | Share | Posted: Mon, 11/24/2008 - 13:42 | Post subject:

jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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

Like | Dislike | Share | Posted: Mon, 11/24/2008 - 23:14 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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.

Like | Dislike | Share | Posted: Tue, 11/25/2008 - 10:01 | Post subject:

steve21's picture
steve21 | Joined: November 23, 2008 11:12 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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.

Like | Dislike | Share | Posted: Wed, 11/26/2008 - 12:56 | Post subject:

banker0679's picture
banker0679 | Joined: November 15, 2007 10:05 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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

Like | Dislike | Share | Posted: Sat, 11/29/2008 - 11:48 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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?

Like | Dislike | Share | Posted: Fri, 02/27/2009 - 16:42 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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.

Like | Dislike | Share | Posted: Fri, 02/27/2009 - 21:05 | Post subject:

gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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.

Like | Dislike | Share | Posted: Tue, 03/03/2009 - 11:16 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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.

Like | Dislike | Share | Posted: Wed, 08/05/2009 - 09:46 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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.

Like | Dislike | Share | Posted: Wed, 08/05/2009 - 09:47 | Post subject:

arya310706's picture
arya310706 | Joined: July 29, 2009 10:26 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

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

Like | Dislike | Share | Posted: Wed, 08/05/2009 - 09:55 | Post subject:

ashleyblanton's picture
ashleyblanton | Joined: February 3, 2009 02:17 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

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.

Like | Dislike | Share | Posted: Wed, 08/05/2009 - 10:47 | Post subject:

gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

but ashley, are you answering mamie? i don't think that's what she wants to know.

mamie - you mentioned you don't know how long you'll be in the home. if you're skeptical about making up the difference in costs by reducing your payments over time, then you might not want to bother with the refinance. you didn't mention any amount of closing costs, but you'd want to be certain that the savings you would reap in refinancing at the lower rate would compensate for the costs you would incur. if you can recover those costs in a 2-year period, for example, then it's usually worth it. if, on the other hand, you don't think you'll be there in 2 years, it's probably not worth the trouble.

Like | Dislike | Share | Posted: Wed, 08/05/2009 - 11:58 | Post subject:

Realgeni's picture
Realgeni | Joined: April 13, 2009 08:03 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Mamie

With $204000 at 6.25% your monthly payment will be - $1256

Same loan at 5.2% will be $1120

AT 4.75% your monthly payemtn will be $1064/-

Exlcuding the closign cost you are for sure goign to save money monthly. But I am not sure what will be closing cost for refinancing.

If you can let us knwo that amount, we can absoultely tell you which one is a better option

Good luck and feel free to ask

Like | Dislike | Share | Posted: Wed, 08/05/2009 - 22:02 | Post subject:

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