The New Refinancing Rules

Oh it’s so tempting to want to refinance. I’m renting out my former house in my former state and I would love to refinance. But, being a rental, it’s not looking so good. That’s because banks don’t hand out money like they used to. After more than a decade of easy money, younger generations (myself included) don’t know what it’s like to not be able to get a loan, even with marginally decent credit.

And trying to deconstruct the mortgage lending morass via the Web is fraught with misinformation minefields. Or so states the Wall Street Journal Online in a recent article.

The refinancing equation has never been more complicated. While some borrowers are desperate to reduce their monthly payments, others are looking to build equity.

This has proven to be my dilemma as well. My mortgage payment (on the rental house), and whether I can get a better rate, is the deciding factor on whether I, with family in tow, moves back to my hometown next fall. I left to take a job in July 2009 to avert a sure financial disaster. If rates stay low for the foreseeable future, I could conceivably lop $300 – $400 off my mortgage payment.

But am I getting bad information from online resources? Should I not refinance? Apparently, there are a few flawed refinancing concepts being perpetuated via the net.

One particularly dubious idea gaining prominence is the “1% rule,” which used to be the 2% rule when rates were higher. The gist: Refinance when you can knock a full percentage point off your rate.

That sounds like a good rule of thumb.

Yet people who followed the one-point rule could have refinanced five or six times in the last 15 years, paying so much in fees that the savings would likely be wiped out.

Point taken. But I don’t think most people refinance every time rates dropped a point. Not unless the fees are negligible or ridiculously low.

Another flawed concept is the standard break-even test. Many mortgage sites suggest that borrowers should calculate how many months it would take to save enough on mortgage interest charges to break even on the closing costs, and then to pull the trigger when the payoff goes below three to five years.

This is a potential flaw because it doesn’t account for how long I plan to stay in or keep the home. It also doesn’t factor in taxes, which would be the correct way to calculate a true mortgage cost. As with the 1% rule, this isn’t an issue for me because my mortgage interest effectively wipes out much of my tax bill.

As with anything you find online, the key is to take it with a grain of salt. One question I always ask if I visit a mortgage lender’s site is, “What are they (the site owners) getting from this?” I’m guessing for the most part it’s not to provide useful, free information to a discerning public. There’s usually an ulterior motive.

Read more about mortgage traps and travesties at the Wall Street Journal Online.


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