What is the 2% rule, and is it useful? | Blue Water Mortgage (2024)

FAQs

What is the 2% rule, and is it useful? | Blue Water Mortgage? ›

The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.

According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.

For example, some experts say you should spend no more than 2x to 2.5x your gross annual income on a mortgage (so if you earn $60,000 per year, the mortgage size should be at most $150,000). Other rules suggest you shouldn't spend more than 28-29% of your gross income per month on housing.

Thankfully, not all lenders observe this 6-month rule. Virgin Money, Mortgage Trust, Paragon and a number of other specialist lenders will allow day one remortgages, but with one important caveat: they only allow the remortgage value to be the price paid for the property within the first 6 months.

In California, the mortgage interest deduction limit is tied to the federal limit imposed by the Tax Cuts and Jobs Act (TCJA) enacted in 2017. Under the TCJA, homeowners can deduct mortgage interest on up to $750,000 of qualified residence loans ($375,000 for married individuals filing separately).

The 2% rule says an investment property's monthly rent should equal at least 2% of the purchase price. According to the 2% rule, your monthly mortgage payment shouldn't exceed $3,000, and you should charge $3,000 in monthly rent. The 2% rule is more extreme than the 1% rule – basically doubling the monthly rent amount.

The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.

Pros and cons of the 1% and 2% rules

That said, investors should be cautious and consider other important factors when determining whether to purchase a property. The 1% and 2% rules may not provide a reliable benchmark for rental property investments in areas with high cost of living or high rental demand.

The 2% rule is an investing strategy where an investor risks no more than 2% of their available capital on any single trade. To apply the 2% rule, an investor must first determine their available capital, taking into account any future fees or commissions that may arise from trading.

For example, if a property costs $100,000, the monthly rent should be at least $1,000. This rule of thumb is based on the idea that a property that generates at least 1% of its purchase price in monthly rent is likely to be cash flow positive.

What two types of loan should you avoid? ›

However, some lenders may offer shorter fixed-rate periods of 1 year or 18 months. The availability of shorter fixed-rate mortgages may vary depending on the lender and the current state of the mortgage market.

Key takeaways

If you miss one mortgage payment, lenders will often issue you a 15-day grace period to pay without incurring a penalty. If you miss four consecutive mortgage payments (or are 120 days late), most lenders begin the process of foreclosure on your home.

The 28% / 36% Rule

To use this calculation to figure out how much you can afford to spend, multiply your gross monthly income by 0.28. For example, if your gross monthly income is $8,000, you should spend no more than $2,240 on a monthly mortgage payment.

As a rule of thumb, personal finance experts often recommend adhering to the 28/36 rule, which suggests spending no more than 28% of your gross household income on housing. For someone earning $70,000 a year, or about $5,800 a month, this means a housing expense of up to $1,624.

Under a new rule from the Federal Housing Finance Agency (FHFA), which took effect on May 1^st, borrowers with lower credit ratings and less money for a down payment will qualify for better mortgage rates, while those with higher ratings will pay increased fees.

Broad guidelines like the 28/36 rule do not account for your specific personal circ*mstances. Unfortunately, many homebuyers today do have to spend more than 28 percent of their gross monthly income on housing.