At What Percent Decrease Should I Refinance My Home?

The traditional 2 percent rule of thumb for mortgage refinance may not apply.

Tradition

The traditional rule of thumb is that it makes financial sense to refinance if the new rate is 2 percent or more below your existing interest rate. The 2 percent threshold for refinance is widely quoted, including on the website of the Massachusetts secretary of commerce. The new rate on a refinance must provide enough savings in monthly mortgage payment to justify the cost of refinancing. The secretary's webpage also notes that circumstances are different for every homeowner.

Considerations

The refinance decision should compare the three factors of monthly payment savings, the cost to refinance and how long the homeowner plans to stay in the home. Bank Rate notes that the national average closing costs on a $200,000 mortgage is about $3,500. If the payment savings from a lower

rate refinance is $100 per month, it would take the homeowner almost three years to recoup the cost of refinancing. If the savings were $200 per month, the refinance would pay for itself in less than a year and a half.

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Source: homeguides.sfgate.com
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