Should I wait until rates fall 2% before refinancing?
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NO. The 2-percent myth is a fable that can cost you big money.
Instead, consider this approach.
Ask how much it will cost up-front to refinance.
Calculate how much you will save each month.
Divide your monthly savings into your up-front costs.
Example: Say it costs $3,000 to refinance but you can save $60 a month. That means it will take 50 months ($3,000 / $60) to recover your “investment.” Thus, in this example, if you are going to stay at the property 50 months or more, consider refinancing.
At this point someone may ask about tax consequences and the future value of money.
Reduced interest costs will reduce tax deductions — but would you rather save $100 in interest or some portion of interest that you can write off? If you spend money for interest, such dollars go to the lender. If you do not spend money for interest, you may have a higher tax bill — but you get to keep more of your dollars.
As to the future value of money, no one knows what value cash will have in the future given inflation and other factors.
Be aware that most lenders now offer programs where you can refinance with little if any cash costs up front. For specifics, speak with lenders about “zero cost” refinancing options — there IS a cost, it’s just in the form of a somewhat higher rate than may otherwise be available.
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