 To refinance or not to refinance
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 Dear
Dr. Don,
I have a 5/1 ARM with an interest rate of 4.5 percent. The five-year
lock ends in June 2009. It can go up 2 percent per year after that
but can't reach a total higher than 9.99 percent. Based on the rising
rates lately, should I worry and refinance right now or ride it
out until then and see what happens?
Thanks,
-- Thomas Turnover
 Dear Thomas,
The decision to refinance out of your 5/1 adjustable-rate mortgage
into fixed-rate product depends on how long you plan on being in
the house, your attitude toward risk and your outlook on interest
rates. If this is a starter home or you plan to downsize in the
next three to five years, then staying in a 4.5 percent loan over
the next three years makes perfect sense. If you don't ever plan
on moving, then you need to at least consider refinancing while
30-year fixed rates are still under
7 percent.
If your mortgage has an annual cap of 2 percent and
a lifetime cap of 9.99 percent, it would be at least 2010 before
your mortgage rate could hit 8.5 percent. While that's about 1.75
percent higher than current 30-year fixed-rate mortgages, you're
not paying any refinancing costs or expenses to stay in your current
loan. What's the worst that can happen? Your loan could go to 9.99
percent in 2011 and stay there for the rest of the loan term. That's
not inconsequential but isn't relevant if you don't plan on staying
in the house.
It's a rough approximation, but if your loan balance
is currently $100,000, refinancing a 4.5 percent loan three years
before it becomes an 8.5 percent loan costs you $8,000 per year
over the next three years. That's $24,000 plus closing costs. Refinancing
today at 7 percent will cost you an additional $7,500 over the next
three years, versus the existing mortgage, plus closing costs. The
interest expense is scalable, so a $200,000 loan balance would be
twice as much plus closing costs.
The Federal Reserve just raised its target for federal
funds a quarter point to 5.25 percent, the 17th consecutive quarter-point
move since its June meeting in 2004. The prime rate followed suit
to 8.25 percent, but the 10-year Treasury note is still under 5.25
percent -- at 5.17 percent as I write this reply. Keep an eye on
the 10-year Treasury note, because it's used as the benchmark in
pricing fixed-rate mortgages. It's been in a range from 4.75 percent
to 5.25 percent since March of 2006. You can follow the 10-year
constant maturity on Bankrate using its rate
watch feature.
Bottom line, if you're not in this house for the long term, don't get overly concerned about refinancing your 5/1 ARM.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
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