Refinancing When Interest Rates Are Climbing
REM #F694
By Ilyce R. Glink
Summary: Many homeowners who have adjustable rate mortgages are closely watching the rise in mortgage rates. Ilyce suggests holding onto these low interest loans for as long as possible.
Q: I bought a house in August, 2004 for $225,000. The mortgage is a 7-year
adjustable rate mortgage (ARM), fixed until 2011 at 5.375 percent.
My mortgage balance is $175,188.
I’ve been noticing that long-term interest rates are going up. I probably
won’t move in the next five years. When should I refinance and how high
will interest rates climb?
A: I'd wait as long as possible to refinance. You have a great rate that’s
about one percentage point below the current market interest rate. Why pay more
now? I'd keep paying at 5.375 percent and start paying down as much of the loan
as possible. That way, when you do refinance, and rates adjust, the monthly
increase (if any) will be nominal.
I'm following my own advice, by the way. I have a 5/1 ARM at 4.185 percent.
And I plan to keep that loan until the last possible minute.
When the loan does adjust, it'll only adjust by 2 points at the most in a given
year. So in year 6, the interest rate will rise to a maximum of 6.185 percent.
The year after, if interest rates keep rising, it'll be 8.185 percent –
still not too bad. In the meantime, I am pouring my interest rate savings into
paying down this loan.
I have another 2.5 years until my loan adjusts, and with the additional year
tacked on, I have 3.5 years to see where the economy is heading before refinancing.
In five years when your rate adjusts or somepoint in between, interest rates
may have fallen again for a variety of reasons. So, take a wait-and-see attitude
and enjoy your savings in the meantime.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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