Posted on: 06th Mar, 2011 01:24 pm
Is there a general rule as to how much lower mortgage rates need to drop from your loan amount to make refinancing worthwhile? Rates seem to be rising which could make this issue a moot point for most of us but I am still curious.
info18, no there is no general rule and there is no set percentage decrease from your current rate because there are a number of items that need to be factored in based on your own personal situation.
First question would be what is the purpose for the refinance? Is it to get cash out, reduce the monthly payment, or shorten the loan payoff term?
Then there are specific questions that need to be asked such as when was the original loan taken out (month/year), purchase price, original loan amount, current property value, current loan balance, any second loans (home equity loan/home equity line of credit, if yes when taken out) what your current interest rate is, the type of loan you have (30 year fixed/5/1 ARM, etc) credit history/credit scores and how long you intend to stay in the home? All these can have a bearing on the answer.
If you want to take into consideration tax issues (assuming you itemize your tax deductions) then need to know your marginal income tax bracket (combined federal and any state income taxes that may apply).
Then there is the time value of money for those that invest on a regular basis or perhaps have a business they plough money back into. If that's the case, then you would also integrate an average annual return that could be gotten into the equation to get a more comprehensive picture of exactly what might be the right course to take and whether or not refinancing would make sense.
Once all the pertinent information is known then the data can be entered into a program to determine the lowest net cost at each year which will also help in the decision making.
Getting a home loan, purchase or refinance, is not a simple matter. It is much more complicated and complex than people believe it to be and that is why there are no straightforward or simple answers. Beware of those who tell you otherwise.
First question would be what is the purpose for the refinance? Is it to get cash out, reduce the monthly payment, or shorten the loan payoff term?
Then there are specific questions that need to be asked such as when was the original loan taken out (month/year), purchase price, original loan amount, current property value, current loan balance, any second loans (home equity loan/home equity line of credit, if yes when taken out) what your current interest rate is, the type of loan you have (30 year fixed/5/1 ARM, etc) credit history/credit scores and how long you intend to stay in the home? All these can have a bearing on the answer.
If you want to take into consideration tax issues (assuming you itemize your tax deductions) then need to know your marginal income tax bracket (combined federal and any state income taxes that may apply).
Then there is the time value of money for those that invest on a regular basis or perhaps have a business they plough money back into. If that's the case, then you would also integrate an average annual return that could be gotten into the equation to get a more comprehensive picture of exactly what might be the right course to take and whether or not refinancing would make sense.
Once all the pertinent information is known then the data can be entered into a program to determine the lowest net cost at each year which will also help in the decision making.
Getting a home loan, purchase or refinance, is not a simple matter. It is much more complicated and complex than people believe it to be and that is why there are no straightforward or simple answers. Beware of those who tell you otherwise.
The General Rule is "if you break even on closing costs in 36 months or less, consider refinancing."
The ends up being simnilar to "the rate must be 2% or lower" if your existing mortgage is less than $100,000
or, "the rate must be .500% less" if your mortgage is over $500,000.
The ends up being simnilar to "the rate must be 2% or lower" if your existing mortgage is less than $100,000
or, "the rate must be .500% less" if your mortgage is over $500,000.
So why is the "general rule" 36 months or less and not 30 months or 24 months or maybe 42 months? And why only use closing costs to determine when you break even?
In my opinion, trying to oversimplify an answer by using generalities is not how you make an important financial decision such as when you should consider refinancing. Unfortunately, often these "general rules" are what people are told and what they go on, later ending up as a very costly mistake.
In my opinion, trying to oversimplify an answer by using generalities is not how you make an important financial decision such as when you should consider refinancing. Unfortunately, often these "general rules" are what people are told and what they go on, later ending up as a very costly mistake.
The "rule" is a "guideline.
Of course every individual situation involves a lot of factors. Many refinance with break even times of longer than 36 months.
I have no idea why the "guideline" is 36 months. It is pretty much just a starting point before looking at a lot of other things. I was just starting in the mortgage business when the old 2% rule (guideline) was quoted by most everyone back in the 1980s. People still quote it today, but, not so much. Back in the 1980s mortgage balances were lower and costs were a little lower. Based on those, the break even time was about 36 months if the rate were 2% lower. I guess it just follows that a break even time of 36 months kind of followed from the break even time of 36 months under the old 2% rule (guideline).
Of course, breaking even less than 36 months is better and longer is often still done, just not as desirable. Anyone can and should analize further considering time intend to live there, tax brackets, other costs, etc.
"Rule" is probably a misleading term. It is a guidline and a strting point in the total picture.
Of course every individual situation involves a lot of factors. Many refinance with break even times of longer than 36 months.
I have no idea why the "guideline" is 36 months. It is pretty much just a starting point before looking at a lot of other things. I was just starting in the mortgage business when the old 2% rule (guideline) was quoted by most everyone back in the 1980s. People still quote it today, but, not so much. Back in the 1980s mortgage balances were lower and costs were a little lower. Based on those, the break even time was about 36 months if the rate were 2% lower. I guess it just follows that a break even time of 36 months kind of followed from the break even time of 36 months under the old 2% rule (guideline).
Of course, breaking even less than 36 months is better and longer is often still done, just not as desirable. Anyone can and should analize further considering time intend to live there, tax brackets, other costs, etc.
"Rule" is probably a misleading term. It is a guidline and a strting point in the total picture.