Refinancing Home Mortgage, Avoid the Traps, Get Expert Advice » two percent rule

Reasons to Refinance

Robert — Tue, 05 Feb 2008 22:06:04 +0000

If you are considering refinancing your mortgage you might wonder what valid reasons are for taking out a new home loan. There are a number of different reasons people choose to refinance their mortgage loans; with mortgage rates at the lowest levels since 2004, now is the perfect time for you to get a new home loan. Here are several tips to help you decide if mortgage refinancing is right for you and to show you how to avoid paying too much for the new loan.

Why Refinance Your Mortgage?

The most common reason for refinancing is to secure a lower monthly payment. In order to lower your payment you first have to qualify for a lower mortgage rate…how much lower depends on your situation.

You may have heard of the so called “two percent rule” of mortgage refinancing; this rule says you should not refinance unless the new mortgage rate is two percent lower than your current rate.

This “two percent rule” is complete rubbish…you can save yourself a lot of money refinancing with a rate less than two percent…it just depends on how long it takes to recoup your expenses form refinancing. You can easily determine how long it will take to recoup your expenses if you know the new payment amount. Simply divide your total closing costs including any penalty you have to pay for early repayment by the difference between the new payment and the old payment amounts. This will tell you the number of months it will take you to recoup your expenses from refinancing your home loan and realize a savings.

Lower Payments Are Not The Only Reason

There are cases where it makes sense to refinance with a higher monthly payment. If your goal is to build equity in your home at a faster rate you could refinance with a shorter term length in addition to qualifying for a lower mortgage rate. While this would get you a higher payment you would be paying less to the lender in finance charges and would build equity in your home at a much faster rate.

Other reasons for refinancing to a higher monthly payment include borrowing against your home equity. Refinancing your home loan and taking cash back is generally cheaper than taking out a home equity loan or line of credit. Since you’re borrowing against the equity in your home you can use the cash for any reason and have the advantage of making one monthly payment instead of two with a home equity loan.

Watch Out For Garbage Fees

Once you’ve decided that mortgage refinancing makes sense you’ll need to be careful to avoid garbage fees and commission based markup of your mortgage rate. Taking out a mortgage is a lot like buying a used car…if you’re not careful it’s easy to overpay thousands of dollars for your new mortgage loan. You can learn more about your mortgage refinancing options including costly pitfalls to avoid by registering for our free mortgage video tutorial.

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Does Mortgage Refinancing Make Sense For You?

Robert — Mon, 06 Aug 2007 18:49:16 +0000

There are a variety of good reasons for refinancing your mortgage. Many homeowners refinance because they want a better mortgage rate, a lower payment, they’re unhappy with the lender, or need to borrow cash from their home equity. These are all valid reasons for refinancing your mortgage, despite the so called “two percent rule.”

The “two percent rule” states that you should never refinance your home mortgage unless the new mortgage rate is two percent lower than your existing rate. The two percent rule oversimplifies the possible benefits of refinancing and is simply bad advice. Many homeowners elect to refinance their Adjustable Rate Mortgages with a fixed rate loan because of the financial risk associated with variable rate loans. Fixed rate mortgages typically come with higher interest rates than their Adjustable Rate Mortgage counterparts so it may not be possible to refinance two percent lower.

Instead of basing your decision to refinance on whether or not you can qualify for a mortgage rate that is two percent lower, you should make your decision based on your needs for the new loan. Refinancing your mortgage will cost you money; if your goal for the new loan is to save money you should consider how long it will take you to recoup your expenses before you realize a savings.

For homeowners looking to cash out equity in their homes a lower interest rate may not be possible; similarly, homeowners refinancing with a shorter term length may not be able to lower their monthly payment. If your goal is to lower your mortgage payment by qualifying for a lower mortgage rate you can calculate how long it will take you to recoup your expenses based on your lower mortgage payment.

To calculate the break even point divide how much it will cost you to refinance including points and settlement fees by the amount you are saving each month. Suppose it will cost you $4,000 to refinance and your new mortgage payment will be $200 lower. With this lower payment it will take you 20 months ($4,000/$200) to recoup the expense of refinancing. If waiting almost two years before realizing a savings from your new mortgage is acceptable to you, then refinancing makes sense in your situation.

Remember there are no hard-set rules when determining if mortgage refinancing makes sense in your situation. Evaluating the cost of obtaining the new mortgage will help you make your decision; however, you should weigh the benefits against the disadvantages of refinancing.

What are the Disadvantages of Mortgage Refinancing?

The main disadvantage of refinancing your mortgage aside from the cost of taking out a new loan is the fact that the clock is rewound to the beginning when it comes to repayment. Mortgage loans are front-loaded with interest and when you refinance you start the amortization schedule from beginning. Amortization describes the process of repaying your loan principle and interest over time. This means at the beginning of your loan the majority of your payment is applied to interest and very little goes to paying down the principle balance. Your tax deduction for mortgage interest will go up because of the higher interest payment; however, you will build equity at the slowest possible rate for you loan.

Mortgage Refinancing Has Tax Benefits

If you are considering refinancing your mortgage to payoff high interest debt like credit cards you will gain a tax-deduction for the interest paid on this debt after refinancing. Not only will you significantly less in finance charges for this debt but the interest paid is fully deductible every year on your Federal Income tax. Remember that while debt consolidation has many advantages it does not eliminate your debts but simply rearranges them making it easier to pay off.

A Lower Monthly Payment Can Free Up Cash For Other Things

Refinancing your mortgage with a lower monthly payment can free up cash in your budget for other things. If you’re a homeowner struggling to make ends meet a new mortgage could give your budget some much needed relief. There are risks associated with certain types of Adjustable Rate Mortgages and many homeowners are tempted with lower payment interest only and option loans. While it’s true that an option loan could get you a lower monthly payment, homeowners who abuse the “minimum payment” that comes with these loans could find themselves underwater when the lender recasts their loan.

Never take shortcuts when it comes to mortgage, foreclosures rates in the United States are rising significantly because homeowners are abusing these risky Adjustable Rate Mortgages. The decision to refinance your mortgage should not be taken lightly; your goal should be to approach lenders as a educated homeowner when refinancing. This will enable you to make a rational and informed decision whether or not a new mortgage makes sense in your individual situation. Doing your homework along with researching lenders and their mortgage products is free; however, neglecting this step when refinancing could cost you a bundle.

You can learn more about your mortgage refinancing options, including expensive pitfalls you need to avoid with my free mortgage video tutorial. For immediate free access to the tutorial and all videos click on the DVD image at the top of this page. The tutorial is completely free with no obligation to you now or in the future.

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Refinance Two Percent Lower

Robert — Mon, 18 Jun 2007 16:37:57 +0000

If you’re considering refinancing your home mortgage you may have heard of the “two percent rule.” This rule states you should never refinance your mortgage unless the interest rate of the new loan is at least two percent lower than the mortgage rate on your existing loan. Is the two percent rule good advice?

The two percent rule of mortgage refinancing is actually terrible advice. Instead of looking for a mortgage rate that is two percent lower it is better to evaluate your refinancing options on a “cost per savings” basis.

What is cost per savings? Simply put, you are evaluating how long it will take to recoup your expenses from refinancing with a lower monthly payment amount. This assumes you are refinancing for a lower payment; however, there are several good reasons for refinancing with a higher payment. Higher monthly payments are a topic for another article.

Suppose you are refinancing your home and your total closing costs including origination fees are $4,000. The new mortgage payment is $150 lower. To determine how long it will take you to recoup your expenses from refinancing divide your costs ($4,000) by the difference in payment amounts ($150) to determine that it will take you 27 months to recoup your expenses. ($4,000/$150=26.6) This is just over two years before you will realize any savings from the new mortgage.

Whether or not you’re okay waiting two years to get your money back from refinancing depends on your situation; however, it’s not uncommon to wait five years or even longer to recoup your expenses. One factor to consider when making this decision is how long you plan on keeping your home. If you refinance or sell before paying back your expenses you will lose money by refinancing. You can learn more about your mortgage refinancing options, including expensive pitfalls to avoid with our free mortgage toolkit.

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Mortgage Refinancing – The 2 Percent Interest Rate Rule

Robert — Fri, 09 Mar 2007 01:22:41 +0000

If you’re considering refinancing your home mortgage loan, you may have heard of the “2 percent rule of thumb.” This rule states that you should never refinance your mortgage unless the new mortgage rate is 2 percent lower than the mortgage rate you’re currently paying. The 2 percent rule is complete rubbish. The best way to evaluate whether or not mortgage refinancing is right for you is on a cost/savings basis. Here are several tips to help you make an educated decision if mortgage refinancing is right for you.

The best way to determine if mortgage refinancing makes sense for your financial situation is to determine how long it will take you to recoup the expenses of taking out a new mortgage loan. You can do this by adding up the total costs for the new mortgage including closing costs and any other fees you will be required to pay. Divide this amount by how much lower your monthly mortgage payments will be and you’ll have the number of months it will take you to break even after refinancing your mortgage.

For example, if it will cost you $2,500 to refinance your mortgage and your new monthly payment will be $150 lower than your current mortgage payment, it will take you almost 17 months before you realize any savings from the new mortgage. If you will recoup your expenses anywhere from five to seven years it probably makes good financial sense to refinance.

There are other reasons for refinancing your mortgage loan even if you don’t qualify for a lower mortgage rate. Many homeowners refinance their mortgages and take cash back at closing in order to take advantage of a tax-deductible loan for nearly any purpose you can imagine. You can learn more about refinancing your mortgage while avoiding costly refinancing mistakes with our free mortgage video tutorial.

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