Refinancing a mortgage loan is a smart maneuver if looking for a way to lower monthly mortgage

Refinancing a mortgage loan is a smart maneuver if looking for a way to lower monthly mortgage payments and create more disposable income. Even though many homeowners are refinancing and taking advantage of low interest rates, this option may not be right for everyone. Mortgage providers and experts offer certain recommendations regarding refinancing. For example, some lenders discourage refinancing if the rate on the new mortgage is less than a two percent reduction. While some homeowners adhere to the two percent rule, there are certain exceptions.

Disadvantages of Refinance

Although the disadvantages to refinancing a mortgage loan are few, homeowners ought to consider the negative side to creating a new mortgage loan. Persons refinancing for the first time may be unaware of the costs. Like the original mortgage, homeowners must apply for the loan, get approved, and execute numerous documents in connection with the loan closing. Buyers typically dread closings because they involve closing fees. Refinance closings are no exception. Therefore, unless the closing costs are included in the mortgage balance, buyers must write a check to cover the fees.

For this matter, borrowers must do an economic analysis—are the closing costs and points recoverable over the expected period or time that the house will be held?

What Is the 2% Refinance Rule?

If refinancing a mortgage loan, lenders encourage homeowners to wait until they qualify for a rate at least 2% below their current interest rate. This way, even if the borrower does not remain in the home for the remainder of the loan term, they are given the opportunity to recoup the funds paid at closing. A 2% interest rate reduction can produce noticeable monthly savings. Moreover, if choosing a cash-out refi option, the new monthly payment is still manageable.

Adhering to the 2% rule is not a requirement. However, if the interest rate received on the new mortgage loan is less than a 2% reduction, homeowners should plan on living in the home for many years to recoup their money. This option may be suitable for homeowners who intend on living in their homes until the mortgage is paid. In this case, any type of reduction great or small will save them money over the next 30 years.