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Does My New Refinance Rate Have To Be At Least 2 Points Lower Than My Current Rate?

By Jim Micheals

Ever heard that it doesn’t make sense to refinance unless the new interest rate is at least 2 points lower than the old one? Even with no points to get that lower rate, refinancing simply to lower the rate might be a costly mistake if three additional factors aren’t considered first.

Moving soon?

The real benefit in refinancing is saving dollars paid in interest over the long run. If the new mortgage costs $2000 to reduce the payment by $125, it takes 16 months to break even. These costs are often rolled into the new loan but it affects the savings by increasing monthly payments and the overall interest paid. Should the home need to be sold before the breakeven occurs, there’s no guarantee that the property will appreciate enough to ensure refinancing isn’t a loss.

Are Closing Costs Too High?

It’s not unusual for final closing costs to be significantly more than those first stated by the lender. Remember that the broker or mortgagors job is to make the lender money. Although it’s illegal not to disclose the full cost of refinance well before closing, homeowners may sign a loan with last minute costs tacked on simply to finish the refinancing process. If refinance expenses hop from $2500 to $4500, it will be 36 months before any savings on the new loan are realized.

What’s the New Mortgage Length?

Often, too much focus is given to lowering monthly payments when reducing the term of the loan is the better deal. Keeping the same payment and shortening the term from 30 years to 20 years will nearly halve the overall cost of financing.

Every Mortgage Is Different

The reality is that every refinance situation is unique and should be reviewed from all possible angles rather than relying on generalizations to make such an important decision.

Related posts:

1. What Is The Catch If I Refinance My Mortgage To A Lower Rate?
2. If mortgage rates are low, should I refinance?
3. Is It Worth It To Pay Points For A Lower Interest Rate?
4. Can Mortgage Points Be Financed?
5. How Often Can I Refinance My Mortage?