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Refinancing: 2% rule of thumb

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 10th Dec, 2005 03:38pm
Refinancing offers you the chance to lower down the rate of interest. Low rate of interest means that your monthly mortgage payment amount will be lower and you will be able to pay the loan with more ease. When you are seeking to get a low rate of interest, you need to follow the 2% thumb rule of refinancing.


The 2% refinance rule of thumb says that it pays to refinance if the rate of interest on refinancing loan is 2% lower than the rate of interest on your existing mortgage loan. Low rate on the new loan implies than you will be able to recover the costs of the new loan. In other words, you will be able to break even the costs of the new loan.


However, this 2% thumb rule of refinancing can’t be used universally. This rule may not be applicable in case of low-cost or no-cost mortgage refinancing loan. In case of a no cost mortgage refinancing loan though there are no upfront fees but all the costs are included in the mortgage rate of interest. So, obviously the rate of interest of a no cost mortgage refinancing loan is higher than the rate of a common mortgage refinancing loan. In other words, the rate of interest of a no cost mortgage refinancing loan is already high and so the 2% refinance rule of thumb may not be applicable here.

Posted on: 10th Dec, 2005 03:38 pm
I am about to refinance for the first time. In the process I heard the term 2% rule. What is it actually?
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
Posted on: 05th Aug, 2009 10:02 pm
First thanks to everyone for their suggestions. I'm still working on refinancing. One lender wants to charge me 2 points which amounts to 4568.00 and an upfront fee which is 3928.00.
In addition will pay off my 5th/3rd loan approximately 4000.00 and Visa card 6000.00. This brings my total loan to 228428.00. And my mortage payment is not lower. However, I won't have to pay debts each month. Any comments? Thanks again
Posted on: 27th Sep, 2009 12:49 pm
Me again...what about a 5/1 arm? I am 70, in good health, and spry.
Posted on: 27th Sep, 2009 12:51 pm
hi mamie,

i don't think it would be a good option to refinance if your monthly payments will not reduce. moreover, you will have to pay an upfront fee as well as 2 points in order to refinance the loan. thus, you will have to pay quite a large sum to the lender but your payments will not reduce. so in my opinion, it won't be good to refinance. however, the decision would be solely yours. if you feel that you would be comfortable paying the dues, then you can refinance the loan.
Posted on: 28th Sep, 2009 12:07 am
mamie, if you're eliminating debt and reducing your overall monthly payments, that's not a bad idea at all.

as for 5/1 arm, be sure you know what's going to take place on that fifth anniversary. they're not a bad deal, if you can get a better rate than currently offered on a fixed-rate loan. it depends on how much you'd be saving on a monthly basis and what you're willing to risk over the long term.
Posted on: 28th Sep, 2009 08:17 am
What are upfront fees ? The rate quoted to me is 5.%. My present rate is 6.25. Is there any way to reduce closing costs?
Thanks again....mamie
Posted on: 29th Sep, 2009 07:47 pm
Hi mamie,

It is a fee paid by a borrower to the lender for making a loan. As far as I know, the upfront fees will be structured as a percentage of the sum committed to the loan as well as a flat fee. As far as your closing costs are concerned, you can negotiate with your lender and check if he can lower the closing costs for you.

Thanks
Posted on: 29th Sep, 2009 11:47 pm
i have 1st mortgage at 5.75% w/$141k balance and a 2nd home equity loan at 8.9% w/19k balance both at 30yr. should i combine them and refinance at 4.75% for 30yr or 15yr. i plan on staying in the home minimum 5yrs, max 10 yrs. what should i do?
Posted on: 03rd Oct, 2009 01:33 pm
if a 15 year loan fits your budget and you want to pay down your principal faster, then that's the plan for you. if you prefer the lower payments, however, 30 years would work and you still have opportunity (by prepaying) to reduce your balance faster. it's a highly individualized decision to make, so i'd dare not tell you which way to go without knowing all about you.
Posted on: 03rd Oct, 2009 01:58 pm
If you cna afford to make the payments then combine them and go for a 15 year payment and probably negotiate for lower interest rate. Normally 15 years is less then 30 years
Posted on: 03rd Oct, 2009 05:14 pm
Joelle,
you can combine both the mortgages.

Tenure of mortgage will depend upon you. lower the duration, higher will be monthly payments. but you will save on total payments.
Posted on: 03rd Oct, 2009 11:47 pm
the confluence of baffled people and untintelligible commentary creates much consternation here. 15 vis a vis 30 - less is more?

the entertainment value of this website is much underrated, as well.
Posted on: 05th Oct, 2009 07:46 am
whomever told you that is so wrong and are scamming your for money, run as fast as you can as there is no refi or 2%; if you qualify for a loan mod the lowest is 2% but that is only if you qualify. our attorneys will qualify you up front for free based on dti.
Posted on: 05th Oct, 2009 05:41 pm
Christine, you are way off base. the original post had nothing to do with a 2% interest rate; it was in regards to the savings being 2%; the rule of thumb that suggests that one has to check the savings of the refinancing transaction in comparison with the costs of the refinance.

there's nobody looking for a modification in this instance.
Posted on: 06th Oct, 2009 07:12 am
Joelle
you can continue with merging option.
Secondly you have a plan to continue in home for min 5-10 yrs.

As a rule of thumb, you should be able to recover closing cost during your stay in the house.

otherwise you are not saving anything
Posted on: 06th Oct, 2009 09:58 am
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