Posted on: 02nd Mar, 2011 12:14 pm
I've read through a number of these posts and in all cases the people are looking at refinancing to a new rate, which is less than 2% better than their existing rate. Why is the 2% rule cited if it is not being advised by the subject matter experts.
Ignore people that speak of a 2% rule. The rule is "refinance when the numbers make sense". Period. For people with larger loan amounts, this savings can be realized with a smaller decrease in rate.
For example, in San Diego California, where 600K loan amounts are commonplace; a decrease from 5.75% to 4.75% would net a $371.56 monthly savings which is a 10.61% change.
Have someone run the numbers for your scenario. It's not only the rate that needs to be looked at, but also the amount of time you have had your current mortgage. The longer you have had your current mortgage, the less you will gain with a refinance.
Make sure you speak with a professional who can run the numbers for you and give you an honest evaluation.
For example, in San Diego California, where 600K loan amounts are commonplace; a decrease from 5.75% to 4.75% would net a $371.56 monthly savings which is a 10.61% change.
Have someone run the numbers for your scenario. It's not only the rate that needs to be looked at, but also the amount of time you have had your current mortgage. The longer you have had your current mortgage, the less you will gain with a refinance.
Make sure you speak with a professional who can run the numbers for you and give you an honest evaluation.
The 2% rule started back in the 1980s when mortgages were about $100,000. The Fannie Mae conforming loan amount was about $95,000.
When you have mortgages with lower balances, it takes an interest rate of 2% less to break even on the closing costs on 36 months or less.
That would still be true today. Some people have mortgage balances under $100,000 and in order for a refinance to make sense for them, the new rate would need to be 2% or more less.
However, today the Fannie Mae conforming loan amount is $417,000 and even up to $729,750 in high cost counties and then there are all the jumbo loan amounts over that. The higher the loan amount, the less a difference in the interest rate is needed to break even on closing costs in 36 months or less.
So, forget the old 2% rule.
The rule back then and still today, is "Does the lower monthly payment allow you to break even on the closing costs in 36 months or less.
When you have mortgages with lower balances, it takes an interest rate of 2% less to break even on the closing costs on 36 months or less.
That would still be true today. Some people have mortgage balances under $100,000 and in order for a refinance to make sense for them, the new rate would need to be 2% or more less.
However, today the Fannie Mae conforming loan amount is $417,000 and even up to $729,750 in high cost counties and then there are all the jumbo loan amounts over that. The higher the loan amount, the less a difference in the interest rate is needed to break even on closing costs in 36 months or less.
So, forget the old 2% rule.
The rule back then and still today, is "Does the lower monthly payment allow you to break even on the closing costs in 36 months or less.
