THE 2% RULE

The "2% Rule" states that you should never refinance your mortgage unless your new mortgage rate is at least 2% lower than your existing home loan’s rate. That no longer applies. Deciding to refinance a mortgage should be done on a cost/savings basis.
Evaluating your refinancing options tells you how long it will take to recoup your expenses and makes it easier to recognize and avoid junk fees. How do figure out how long it will take to recoup your expenses when refinancing?
1. Figure out what your new monthly payment will be using a basic home mortgage refinance calculator.
2. Subtract your new lower payment from your old payment and you’ve got your monthly savings .
3. Total up all of your closing costs including any loan origination fees you’re paying the person arranging your new mortgage.
4. Divide this total by your savings and you’ve got the number of months it will take you to recoup your expenses from taking out a new mortgage loan.

What You Should Know Before You Refinance Your Mortgage

It all depends on three factors on a sliding scale:
1. How much you can reduce your interest rate.
2. How much you’ll pay in closing costs.
3. How long you plan to live in the home.
The real key is the break-even point. That’s the number of months you should plan to keep the home after refinancing in order to recover your closing costs. For example, if you pay $3,000 in closing costs and you manage to lower your mortgage payments by $150 a month, you would reach the break-even point in 20 months. As long as you plan to live in the home longer than that, refinancing could be worthwhile. It’s a sliding scale. The smaller your savings, the longer you need to stay put.
There are a couple strategies to tweak the sliding scale by minimizing the price of closing costs when you refinance.
1. Ask your current lender to refinance you. In order to keep your business, your lender may be willing to waive certain closing costs.
2. Ask for the "reissue rate" on your title insurance, a savings of 40 to 50 percent.
3. Ask for an automated or drive-by appraisal, which is cheaper than a full-fledged one.
4. Get your lender to skip the credit check. After all, the company is intimately familiar with your payment record.

REFINANCING - How to Make It Work

If you have decided that refinancing makes sense for you, follow these tips to make sure you do it wisely:
1. Shop around for interest rates. The Internet is a good place to comparison shop, but be wary of unknown companies.
2. Hold the line on closing costs. Some lenders are taking advantage of low interest rates to jack up their closing costs.

3. Start with the bank that currently holds your mortgage. They may give you a good deal just to keep your business.
4. Avoid paying points. When you refinance, you can deduct only a portion of the points each year.
5. Don’t try to outsmart the market and wait for interest rates to hit their low point. If the numbers make sense, jump in!

ZERO COST REFINANCING

Don’t have the ready cash to close on a refinanced loan? Ask the lender to absorb your closing costs by raising your interest rate by an eighth or quarter percentage.
Benefits are:

1. No upfront costs.

2. Immediately cut interest rate & monthly payment with no out-of-pocket expense.
Drawback:
You don’t get lowest possible interest rate.