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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?
i have a 10yr loan 200k at 4.3% and i year in, i was offered to refi the loan 190k for 10yr at 3.875 at no cost to me should i do it
Posted on: 05th May, 2011 06:29 pm
Welcome docrab,

If you're planning to stay in the property for a longer period of time, then it will be a good option to refinance the loan. The rate that is offered to you is quite low.
Posted on: 05th May, 2011 10:51 pm
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