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2% rule of thumb in refinance

I am about to refinance for the first time. In the process I heard the term 2% rule. What is it actually? by samhill334 from Memphis, Tennessee. May 9th 2011 Reply


Gianni Cerretani (mortgagegodfather)
#33 ranked lender in Georgia - 238 contributions

The 2% rule is that most of the time when you are refinancing for it to be financially worth it, the general rule of thumb is that you want to see a decrease in your current interes rate of 2%. Unfortunaltely that is not always the case as you may have other objectives that need to be accomplished with in the refinance, for example: getting out of an adjustable rate mortgage, or switching from a 30 year term to a 15 year term or consolidating debts and or getting cash out. As you can see it is not a rule but merely a consumer myth. If you need any more help in regards to your refinancing situation I would be more then happy to help.

May 9th 2011
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Chris Gummerson (cgummerson11)
#393 ranked lender in California - 648 contributions

I am not 100% sure on your question, but you are probably referring to the "net tangible benefit" meaning there must be a benefit to re-write the loan. You might need to save 2% of you payment, or have the rate lowered by 2%. I am not sure of your scenario and loan details. But I would imaging it has to do with your costs of the loan and the benefit to you. If you take your existing payment, adding in any debts, like car payent that will be paid off in the refi, and then look at your new payment of your mortgage. The new payment must be lower. or save you money if you are paying off another type of account. Feel free to follow up so I can get more details about your question.

May 9th 2011
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Joe Shamie (Joe Shamie)
#4 ranked lender in New Jersey - 1,412 contributions

I think what you are referring to is the interest rate savings one should realize before the refinance transaction is beneficial to the borrower. However, that rule is NOT the correct way to determine if the transaction is beneficial. One should make this determination by conducting a breakeven analysis on the transaction by taking the total transaction costs and dividing them by the monthly payment savings. The result of this calculation will give you number of months it will take you to recover the costs with the savings you realize. Give me a call and I will be glad to take you thru this analysis and help you determine if you will benefit from refinancing. Joe Shamie 877-662-3321 x-102.

May 9th 2011
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Tom Stevens (Thomas.Stevens)
#21 ranked lender in Massachusetts - 68 contributions

There was a time when homes were priced $25,000 or below when it made no sense to refinance unless you were saving 2 percentage points on your interest rate or more. That rule-of-thumb is oudated but still persists. There is no magic number. In general, homeowners with higher loan amounts will see refinancing make sense with less of a change in interest rate than those with lower balances. The thing to do is to forget that rule and simply ask for a "payback period" - that is, how long will it take for the cost of the refinance to be paid in monthly savings off your mortgage payment. In other words, when will you recover the costs and start saving. The answer is subjective but most homeowners are happy if they can recover the costs within 2-4 years. There are no closing cost loans, but those simply pay for your costs with the interest rate. No closing cost loans make the most sense when rates are on the decline as you can keep refinancing without any financial penalty. Having hit the bottom, rates will likely trend up, not down.

May 9th 2011
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