The Rule Of 72 And Your Mortgage Refinance

The Rule of 72 and Your Mortgage Refinance

The great thing about money is you can calculate how much you will have, and how much you have lost, with a simple formula and extreme accuracy. One such formula, the Rule of 72, helps determine how many years it takes for money to double – or debt to double, as the case may be in your mortgage refinance.

Using the Rule of 72 when shopping for your mortgage refinance can be very handy, especially if you do not intend on keeping the house for the rest of your life. By plugging your new rate from the mortgage refinance into the formula, you can quickly, easily, and accurately figure out exactly when you would want to sell the house or do another mortgage refinance.

How it Works

All that you have to do is divide 72 by the rate of your mortgage refinance. For instance, let's say your new rate would be 6% - just as an example – your debt would double every 12 years. However, there is a special rate you should run from if you are paying it with your mortgage refinance, but fall all over yourself if you have a chance to earn it.

When the rate on your mortgage refinance doubles, your debt doubles twice as quickly. Or at least, that is the typical way of things. For instance, a 4% rate on your mortgage refinance would cause your debt to double in 18 years, whereas 8% would double your debt in 9 years.

Logically then, 12% would work the same, and double every 6 years. However, if you were to chart it out for your mortgage refinance, you would quickly see that by doubling your debt every 6 years, the amount you owe increases much faster than any other rate. Three times as fast, to be precise.

Knowing this about your mortgage refinance and how quickly your debt would double, you are now better prepared to pick the best rate for you. However, it should be noted the Rule of 72 only works for scheduled (also known as “rip off”) loans.