Refinancing When Interest Rates Are Climbing

Added April 11, 2006 by Ilyce R. Glink

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Summary: Many homeowners who have adjustable rate mortgages are closing watching the rising mortgage rate. If you have a great rate, you should wait as long as possible to refinance. If you start paying down your loan quickly, you can help avoid a huge payment increase when it is time to refinance.

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 some point 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.

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