Question: My husband and I own a one-bedroom condo in Brookline, Massachusetts which has a pretty strong real estate market, but has dwindled some with the recent downturn. We currently have a 5/1 arm at a 3.75% interest rate and have lived in our home for 2.5 years. We are not yet sure if we will sell in the next couple of years or if we will keep the home, refinance to a fixed-mortgage and then pull out some equity to buy a larger home and rent this one-bedroom out.
With the recent lowering of interest rates do you think we should consider refinancing now even if it increases our current monthly payment, or do you think we should wait until we are closer to selling? Thanks! Adrienne
Answer: For people in circumstances like you, without any immediate pressure to refinance, a big part of the answer comes from your need or desire to take out an “insurance” policy. Of course, I have no idea where interest rates will be in two to three years. I can just as easily make the case that they will be lower or higher or the same (mostly depending on the outlook for inflation).
Instead of an answer, I have a bunch of questions. Probably the most important is: Will you sleep easier at night locking in today’s low rates, even if it turns out two years from now that you would have come out ahead financially by standing pat? Is the price of that interest rate insurance policy worth it to you? Or will you be filled with regret? In the past, I’ve stuck with my 5-year adjustable rate mortgages and I was comfortable with the gamble (and in each case I got lucky). However, considering all the turmoil in the economy and financial markets I might act differently this time if I were in similar circumstances.
Other factors that can influence your decision: How stable are your jobs? And how realistic is it for you to become landlords? When you look at all of your assets and liabilities, where are you comfortable taking risks with your money and where would you like to buy some stability? And, of course, will you be moving in two-to-three years?
I realize it’s often annoying to have a good question answered with a string of additional questions. But hopefully they’ll lead you and your husband to an answer.