Old Refinancing Rule Proves To Be A Myth
By Tony Byrd, Resident Moneta, 24121  

With the recent cuts in interest rates, many homeowners are “seizing the moment” and refinancing their current home mortgage to a better rate. Unfortunately, some may miss this opportunity to save literally thousands of dollars over the course of the their loan by following an old refinancing rule.

 “The 2% Rule,” as it is commonly referred, is a rule of thumb that says in order to make it worth while to refinance, you need to reduce your interest rate by at least 2 percent.  Although this idea used to hold true, in recent years it has proven to be no more than a myth for the following reasons:

 • Mortgage Balances -- Home values and respective mortgage balances have risen to the point that a small decrease in rate, (sometimes as little as 1/2 of one percent) can have a significant impact on the interest charges over the life of the loan.

 • Program Alternatives -- New financing plans, such as no-closing-cost-loans, make even the slightest reduction in rate a make-sense refinancing opportunity.  For example, if you can reduce your current interest rate from 7.5% to 7.125%, and it costs nothing to do it, why not?

 The fact is, the decision to refinance should be made after considering many individual factors, such as:  how long you plan on owning the property, current mortgage balance, debt repayment options, etc. . . . The number of points your rate would drop does not tell the whole story.

Tony Byrd is a mortgage consultant at the Smith Mountain Lake office of Salem Financial, LC.  He can be reached at (540) 721-3662 for a free mortgage analysis.