Is there any truth to the 2% mortgage refinancing rule?
This rule is somewhat obsolete due to the variety of closing cost options that exist today. With the proliferation of no cost and zero point mortgages, a potential refinancier can recoup the costs of refinancing very rapidly if not immediately. The 2% rule may be a helpful tool when paying both points and closing costs in order to refinance. Sources: http://www.erate.com/refinance_2_percent_rule_refinancing_mortgage.
Your mortgage may have a 30-year term, but not many homeowners stay with the same loan for that long. In fact, the average American refinances his or her mortgage every four years, according to the Mortgage Bankers Association. That’s because paying off your present mortgage and taking out a new one can mean big savings over several years. However, mortgage refinancing comes with a price in the short term, so it’s important to consider both the costs and benefits before making your decision. Why refinance? Here are some reasons to consider mortgage refinancing: * To obtain a lower fixed rate. If you took out a fixed-rate mortgage several years ago and interest rates have since dropped, refinancing may lower your payments considerably. A $150,000 mortgage with a 30-year term and a rate of 8 percent, for example, carries a monthly payment of $1,100. The same mortgage at 6 percent will have a payment of less than $900 a month. * To switch to a fixed rate or an adjustable rate mortgage. Ad
The intent of the 2 percent rule is good. Basically, the original advice was that you shouldn’t refinance unless you can recoup your closing costs, including the appraisal costs, title insurance, and the rest of the laundry list of fees that accompany a mortgage refinance. The 2 percent rule assumes that it takes two years to do so. However, this reasoning doesn’t apply to people who plan on staying in a house longer than two years. Remember, the idea behind the rule is that you want to recoup your closing costs. Let’s say the differential between current rates and your loan rate is less than 2 percent. It might still make sense to refinance if it takes four years, for example, to recoup your closing costs. The key is that you stay in your home at least four years, if not longer. Sources: http://www.mortgageloan.
