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Mortgage Refinancing – The 2 Percent Interest Rate Rule

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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.

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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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