Dear Al,
We are currently one year into a 5-year adjustable rate mortgage at a 4.75% interest rate. Our house is appraised at $300K. The mortgage balance is $176K and we have a $50K home equity loan. The home quity is indexed with a variable rate, never lower than 3.99%. I don’t like the home equity loan and wish we hadn’t done it that way, but I can’t change the past. We will definitely be moving to another state at the end of five years. With interest rate rising, are we better off staying as it is or would you refinance?
Angel.
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Dear Angel,
Concerning your two adjustable home loans totaling $226K, you’d better be certain that you’re really moving within five years. More importantly, pray that there’s not an appreciable drop in real estate values during that period, as your loans already equal 75% of current value. What would you do if the rates on your loans increased by 3% while the value of your home were to decrease by 30%? It may sound far-fetched, but I’ve lived through markets that were even worse. Were it my choice, I’d stick with the loans you have. There’s no way you can compete with your current rates, and as you intend to leave in the not too distant future, a refinancing would most likely not save you anything. One additional thought on that second mortgage you’re unhappy with: If you come into spare cash from time to time, you might want to pay it down somewhat, providing there is no prepayment penalty to contend with.
Al Jacobs
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AL JACOBS has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody’s Fool: A Skeptic’s Guide to Prosperity. You’re invited to subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation by visiting www.onthemoneytrail.com.
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