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From: ded@milo.UUCP (Don E. Davis)
Newsgroups: net.invest
Subject: The 3% rule
Message-ID: <182@milo.UUCP>
Date: Mon, 3-Feb-86 09:06:35 EST
Article-I.D.: milo.182
Posted: Mon Feb  3 09:06:35 1986
Date-Received: Fri, 7-Feb-86 20:17:38 EST
Reply-To: ded@milo.UUCP (Don E. Davis)
Organization: JHU/Applied Physics Lab, Laurel, MD
Lines: 24

There is something called the 3% rule which states that you
should not refinance a mortgage unless the new rate is at least
3% below your current rate.

Now that mortgage rates have apparently bottomed out (only 2% below
my current rate) I did some calculations.  Since refinancing will
cost about $3000, and reduce my payment by $128, I figured it this way:
The $3000 is a loss, so I calculated what I would have make if I 
invested the $3000 at 10.5%.
The gain is $128, so I calculated what I would have if I invested $128
per month at 10.5%.  The break-even point occurs after 2 1/2 years.
It takes 2 1/2 years to make up the loss of the $3000 dollars.  Thereafter,
I save thousands of dollars.  

It seems to me that, as long as I keep the mortgage at least 2 1/2 years,
this is a good deal.  Am I missing something?  Maybe we should rename
it the 2% rule.  Actually, maybe we just shouldn't have a rule.  The
criteria seems to be the cost of refinancing and how long you expect
to keep the mortgage.  If you plan to pay the mortgage to the bloody end,
even a difference of only 1/2% might be worth your while, though I
wouldn't recommend locking yourself in for an inordinate amount of time.
But 2 1/2 years is perfectly reasonable.
					
					don davis