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How to Decide if Mortgage Refinancing Right For You

If you’re a homeowner deciding if mortgage refinancing makes sense in your situation there are a number of factors you’ll want to consider. There are many valid reasons for refinancing your mortgage despite the so called “two percent rule.” Here are several tips to help you decide if mortgage refinancing is right for your individual situation.

There are a number of good reasons for any homeowner to consider mortgage refinancing. Many choose to refinance because they want a lower interest rate, payment amount, a new lender, or need to cash out equity in their home. These are all perfectly good reasons that go against the so called mortgage refinancing “two percent rule”

The Two Percent Rule of Mortgage Refinancing

The two percent rule of refinancing says that you should never refinance your mortgage unless you qualify for a rate two percent lower than you’re already paying. This rule is complete rubbish you should chalk up as bad advice. Suppose you are for example, a homeowner with an Adjustable Rate Mortgage wanting to switch to a fixed interest rate. Fixed rate mortgage loans typically come with slightly higher mortgage rates so it might not be possible to refinance with a rate that is two percent lower.

As an educated and financially savvy homeowner it makes sense to evaluate your mortgage refinancing options on a cost and savings basis. Taking out a new mortgage will cost you money; there are lender fees and closing costs you’ll bee required to pay. You can easily calculate how long it will take you to recoup these expenses if you are getting a lower mortgage payment. To calculate the break even point simply divide the total amount you’ll be required to pay in securing the new mortgage by the amount you are saving each month.

Suppose your new mortgage will cost you $ 3,500 and you will save $ 150 per month with a lower mortgage payment. Simply divide your costs by the savings ($ 3500/$ 150=24) to determine that it will take two years to recoup your expenses from refinancing. Remember this only applies to homeowners that are refinancing to get a lower monthly payment. There are many valid reasons for refinancing when you do not qualify for a lower interest rate or payment amount.

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