Don’t rush into home refinance

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Dear Dr. Don,
I have two mortgages. The first mortgage is a 5/1 adjustable-rate mortgage that will adjust in September 2010. The current loan balance is $168,000 and the loan is at 5? percent.

The second mortgage is a 30-year fixed-rate mortgage at 8 percent with a $49,000 loan balance that I refinanced last year.

Should I refinance the first mortgage so I’ll have peace of mind that I can handle the payment in 2010? I have no plans for selling the place anytime soon. I might stay in the house for another 10 years, more or less.
— Olivia Options

Dear Olivia,
I understand your dilemma. In fact, I’m living it. In less than a year, my 5/1, 5? percent ARM resets for the first time.

Where we differ is that I don’t plan on staying in the house for another 10 years. I’ll make the assumption that you’re in a piggyback mortgage with the second mortgage and that you don’t have the ability to combine the two existing mortgages into one mortgage.

I can’t tell you where interest rates will be two years from now, but the risk is that they’ll be higher than the current Bankrate national average of 6.15 percent for a 30-year fixed-rate mortgage.

Refinancing today, however, at that rate means you’ll pay about $4,000 more in interest expense (pretax) over the next two years until your loan resets. If you use that money instead to make additional principal payments on your second mortgage, you’re guaranteed to save 8 percent on the additional principal payments.

I’m not trying to talk you out of refinancing into a fixed-rate mortgage, but you’ve got two years and I wouldn’t rush into refinancing in September 2008. I say that because of the potential impact of the government’s recent decisions concerning Fannie Mae and Freddie Mac and the stabilizing effect that should have on the mortgage market.

Instead, keep the finger on the pulse of the mortgage market by reading the weekly “Mortgage analysis” column published every Thursday on Bankrate. I have mine delivered as an e-mail.

You shouldn’t have a goal of trying to time the market and get the lowest rate, and there’s no reason to rush in here. I think you’ll be able to do better than 6.15 percent eventually. Keep your eye on the market and be ready to act.

I also suggest that you take a look at the following calculators — Bankrate’s “Fixed vs. adjustable rate” and the Mortgage Professor’s financial calculator “Refinancing an ARM into a FRM” — to project the savings.