Thursday, January 1, 2009

When Is It Time To Refinance An Adjustable Rate or Interest Only Mortgage? (Part 2 of 6)

Does it sound crazy that someone would give up an interest rate in the low 4’s to take an interest rate of 5-5.25% - AND spend thousand of dollars to do it? Many people today are doing just that. “Why?!?!?” you might ask. Well let’s look at some history and basic Econ 101.

What eventually happens after a government prints trillions of dollars and pours it in to its economy? INFLATION! What is the evil nemesis that triggers interest rates on mortgages to shoot up? INFLATION! Forget the effects of shouting “Fire!” in a crowded theater, as this will be nothing like the stampede many believe will be storming through the gates when INFLATION becomes the common call we all hear in the news.

Don’t get me wrong, I’m happily paying the extraordinarily low interest rates we have on our home equity lines of credit, grinning from ear to ear at such “cheap money”. But, folks, these interest rates are NOT NORMAL, and like the high housing prices many thought might go on forever they are UNSUSTAINABLE. I’m just grateful that our home equity lines of credit have terms that allow us to make a simple phone call to lock in a fixed interest rate on it when the tide turns, which it inevitably will do. I’m expecting to be on hold for quite a while the day I make that call while our bank sorts through the many other people frantically trying to so the same thing.

So, what if you have a nice low adjustable interest rate? Why would you want to pay the closing costs associated with refinancing AND/OR take a higher interest rate than you are presently paying? Well, I don’t know about you, but MY crystal ball seems to be a bit foggy. There is no clear projection on WHEN the interest rates will rise, nor HOW FAR or HOW FAST they will rise. What happens if you have a projected interest rate target, and you miss it? If you end up with a higher rate for the long term fixed rate mortgage you refinance in to, did hanging on to the lower adjustable rate a while end up costing you much more in the long run? So, maybe you give up 3/8% in annual interest savings for a year, but then you end up with ½% higher on the fixed interest rate for the long haul.

Gauging this exactly is as easy as gauging “the bottom” in the real estate values…we’ll only know it was there when we’re looking back. So, taking in to consideration that we presently have interest rates we haven’t seen in many decades, do you think it’s a pretty good gamble to take to lock in a fixed rate now?

See you at the closing table!
Karen Cooper – OR/CA Mortgage Consultant –

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