2 Reasons Why You Don’t Have To Drop Your Mortgage Rate by 2% To Justify A Mortgage Refinance

January 9th, 2012 |

Author: yroth

I get the mortgage question a lot about how much does the mortgage rate have to drop before it makes sense to refinance the existing mortgage.

This morning a homeowner I was talking to was under the impression he needed to drop his mortgage rate by 2% in order to justify refinancing his mortgage.

Here’s are the 2 reasons why the 2% rule doesn’t make sense.

Reason #1. In addition to the mortgage rate drop, you want to look at the mortgage payment.

Let’s say you’re only dropping your mortgage rate by .75% but your mortgage payment is dropping by $100 per month.

If one of your goals is to improve your monthly cash flow by lowering your mortgage payment, you just accomplished that and you only dropped the mortgage rate by .75%.

Reason #2 why you don’t have to drop your mortgage rate by 2% to refinance your existing mortgage to justify refinancing your mortgage.

Let’s say that you dropped your mortgage rate by .75% and you’re saving $100 per month.

Let’s also say that the closing costs to do that are only $1200. That means that it’ll take you 1 year to recoup your closing costs.

That’s a short recoup period and makes sense as long as you plan on keeping the mortgage for at least 1 year and aren’t losing equity by resetting the mortgage term back to the orginal mortgage term.

In conclusion, the 2 reasons why you don’t have to drop your mortgage rate by at least 2% to justfy refinancing your mortgage are as follows: if you can lower your mortgage rate (even .5%), save money each month by lowering the mortgage payment, you can recoup your closing costs within 1 year and you’re not losing a lot equity by resetting the mortgage term more than 2 or 3 years, a mortgage rate reduction less than 2% makes sense.

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