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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?
Welcome Kwok,

It is true that once you refinance the loan, you will get a loan of 30 years. Thus, you won't be able to own the property free and clear prior to 30 years. If you plan to live in the property for a longer period of time, it does make sense to refinance the loan in order to get low interest rates and reduced monthly payments.
Posted on: 13th Sep, 2010 01:26 am
Consumer, take the time to understand the situation and make your own decision. A mortgage broker does not have a fiduciary duty to make a recommendation in your best interest. A fixed rate mortgage is front-end loaded so the initial years mostly pay interest. Yes, consider the change to your monthly payment. But, also consider whether or not your present mortgage is paying off principle and if you do refinance, how much longer you'll have to make those monthly payments. Even if you won't be in the home until payoff, you'll receive a higher credit when the house sold because you paid off more principle. After you refinance, you're back to mostly interest being paid for the first few years.
Posted on: 11th Oct, 2010 02:42 pm
if i was to refinance today i'd pay $4,826 in closing cost to save $154.37 in monthly payments. that's (4 835 / 154.37) = ~ 31.26 months to break even.
i'll likely stay longer in the house but i am not sure that's such a great deal.
Posted on: 21st Oct, 2010 10:20 am
I currently owe 110,000 on a property with the tax statement saying a RMV of 194,390. It is a fixed 30 yr loan with 6.625 %. The loan was generated in 2003.
I would like to go to a 15 yr fixed
My gross income last year was 52,000. My total debt including my house is 118,000 and I have a high credit rating. I have been at my place of employment for 11 yrs. Should I refinance or just pay extra to pay off the 110,000 in 10 to 12 yrs as I would like to have it payed off when I retire.
Problem is this is a Mobile Home and it seems to have a higher interest rate then a stick built house. Thanks for your time Cheri
Posted on: 18th Nov, 2010 10:25 am
Welcome Cheri,

You can refinance your existing mortgage and get a 15 year fixed rate mortgage. If you can afford to pay the closing costs, then it will be a good option to refinance as you'll be able to get rid of your debts quite earlier.
Posted on: 18th Nov, 2010 10:38 pm
Hi I bought my house in march 2008 for 120,000 at 6%. My current principal and interest is 713, home insurance 48 and taxes 284 a month. My balance is 115,000. Should I refinance 120,000 at 4.25 with closing at 2,222? New principal and interest would be 592, 284 for taxes, 30 home insurance and a 85 a month risk insurance till 20 percent paid off which I didn't before. Any help for me?
Posted on: 23rd Nov, 2010 05:49 pm
I pay 1056 now and refinance would be 992, worth saving 60 a month?
Posted on: 23rd Nov, 2010 05:54 pm
Hi zach,

It will be a good option to refinance as you are getting a lower mortgage interest rate. However, if you're planning to leave the property soon or sell it off, then it won't be a good option of refinance the loan as you won't be able to offset the closing costs. You will have to pay for the risk insurance unless you pay off 20% of the loan.

Thanks
Posted on: 23rd Nov, 2010 11:15 pm
Considering a refi from 6.25 to 5.01 & putting 50k savings additional toward refi balance which lowers our payment alot but is it a smart investment..we plan to stay..have 26 yrs to go presently...otherwise would invest the $ in stocks, bonds..better return to put it on the house?
Posted on: 24th Dec, 2010 07:49 pm
To get an accurate answer, there is a lot more information needed than what you provided. Actually, to make this decision you should consult with a qualified financial advisor, which I know is easier said than done.

Just some of the things to consider are what the current value of the home and loan balance are, your tax bracket, what you are currently investing in and the returns you are getting, your risk tolerance level, your age and overall financial goals and so on and so on.
T
Posted on: 25th Dec, 2010 02:18 am
currently have 11 years 11 months left on a 15 year mortage with a balance of 174,500.00. The interest rate is 6.125%. New option is 15 year fixed on 183,000.00 (includes an origination fee of 3130.00 and 2931.27 for all other settlement services) at 4.5%. New payments would be 336.00 less a month but I would be adding 3 years to loan. I do plan on being in this home but am about 10 years from retirement. Should I refinanc
Posted on: 08th Feb, 2011 07:56 pm
Hi susan,

As you plan to stay in the property for quite a long period of time and as the interest rate offered to you is quite low, it will be a good option to refinance the mortgage.

Thanks
Posted on: 08th Feb, 2011 11:03 pm
Susan, like most questions regarding a mortgage, unfortunately this is not a simple question that calls for a simple answer.

As you mentioned, while your monthly payment would drop by $336 less per month, you would also be extending your scheduled pay off date 3 years. If you are about 10 years from retirement, in most cases it would be highly advisable to enter retirement mortgage free. To refinance into another 15 year term would be going in the wrong direction based on this, unless we do some number crunching.

This I could do if you provide me with original loan amount, current monthly principal and interest payment, current estimated value of the property and your credit scores if you have them, best estimate if not.

So the questions right now are if and can you refinance, and if so what would be the best term and options to consider to provide you with the best net cost and strategy going forward.
Posted on: 09th Feb, 2011 02:28 am
This issue is something that has a real impact for individuals having a mortgage. With regards to your concern, talking to a best mortgage broker is a very necessary action to do.
Posted on: 10th Feb, 2011 07:22 pm
Mortgage brokers and others in the business that originate loans may or may not be able to give you the correct answer as to whether or not it makes sense to refinance. Remember that they get paid when someone does a refinance with them so there is an incentive built in to their answer.

Key factors needed when deciding if it is to your advantage to refinance is how long you expect to keep the loan, upfront costs, your tax bracket if you itemize deductions and equally as important the reason you want to refinance in the first place. Is it to lower your monthly payment, take cash out, etc? Only a qualified mortgage consultant putting your interests first will be able to give you the right answer to this question.
Posted on: 10th Feb, 2011 09:54 pm
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