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From: levy@ttrdc.UUCP (Daniel R. Levy)
Newsgroups: net.invest
Subject: Re: The 3% rule
Message-ID: <719@ttrdc.UUCP>
Date: Sat, 8-Feb-86 18:55:27 EST
Article-I.D.: ttrdc.719
Posted: Sat Feb  8 18:55:27 1986
Date-Received: Tue, 11-Feb-86 06:49:15 EST
References: <182@milo.UUCP>
Organization: AT&T, Computer Systems Division, Skokie, IL
Lines: 38

<Oh oh here it comes.  Watch out boy, it'll chew you up! \
Oh oh here it comes.  The LINE EATER!  [Line eater]>

(skip one page now if you don't want to see the quote)
In article <182@milo.UUCP>, ded@milo.UUCP (Don E. Davis) writes:
>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

Don't forget to factor in the effect of tax deductions for interest.  While
they aren't usually enough to pay the interest itself (a slight understate-
ment!) they will add to the 'break-even' time you cite.
-- 
 -------------------------------    Disclaimer:  The views contained herein are
|       dan levy | yvel nad      |  my own and are not at all those of my em-
|         an engihacker @        |  ployer or the administrator of any computer
| at&t computer systems division |  upon which I may hack.
|        skokie, illinois        |
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