Randi's Blog

Whenever we hear that the mortgage rates have gone down this is the question we ask ourselves. We hear everywhere that rates are down and it is time to refi. But is it really time to refinance? Of course you have heard the rule if the rates drop 2% then you should refinance. But is that a rule for everyone? I think not. Say you have a $50000 mortgage on your home at a 7% interest rate. The mortgage payments are $332.65 per month. Now if rates go down 2% to 5% then the mortgage payments would drop to $268.41. This is a savings of $64.24 per month. Well you say that is something and I say is it? If you figure that your costs to do this loan will be around $2000 it will take you about 31 and 1/4 months before you can break even and start savings. Are you still going to live in this house almost three years from now? Maybe or maybe not. I would want to start saving a little sooner wouldn’t you? Here the 2% rule doesn’t really work.

Now say you have a $250,000 home loan. Your mortgage rate is 7% and your payment is $1696.52. The rates drop to 5% so your new payment will be $1,342.05, a savings of $354.47. This looks a lot better don’t you think? Now how long is it going to take you to start saving? Say your fees are $5000.00 in costs. It costs more to refinance (refi) a small balance loan because everyone has a minimum fee and the $50,000 loan would be well into the minimum fee scale. Well back to our example it would take 14 and 1/10 months to start saving. You are very likely still going to be living in that house 14 months from now.

I like to use the 2 year rule myself instead of the 2% rule. If you can make up the cost and start savings in two years or less then it is a good time to refinance. That is the answer to the question. Other other hand if you want to trade up aReal Estate Agent is the one to ask.