What Would You Do?: Should This Variable Rate Mortgage Be Refinanced?

should i refinance a variable rate mortgageWelcome to the eighth edition of “What Would You Do?”! If you have a question and would like to know what others would do please contact me and I’ll keep it in mind for future editions of “What Would You Do?”. Some of the more popular editions have asked Should I Buy the NeatDesk or NeatReceipts ScannerWhat Would You Do With $1,000,000 and Should I Pay Off My Car Loan? Now on to this week’s question…

This is our first reader submitted What Would You Do and I think it is a great situation to consider. Below is what the reader has shared with me. I have edited it a bit to protect any identifying information and to make it read a little better.

I have a question that I think affects a lot of folks these days, but doesn’t get much press. I have a variable rate mortgage that will reset for the first time on April 1st.

My rate will reset to 3.125% (calculated by adding 2.375% to the LIBOR) interest at that time. Of course I have the option of paying the extra savings toward the principal over a few years, but I don’t plan to stay in the home for more than a few years. I am planning to go ahead and let it reset.

I have been approved for a refinance under the HARP program, and the new lender is pressing me to set a date to do the close. They told me to expect to pay around $2,300.00 in closing costs in the beginning, and now that we are closer to closing, those costs have mysteriously risen to around $3,500.00.

Since I don’t plan to be in the house more than 3 years at the most, I don’t see the point in investing in the new mortgage. I’m surprised that there isn’t more talk about those in a similar position that may be falling for HARP, and because like me they are underwater, are rushing to take 3.99% refi’s because they’re scared to death not to.

I may be unique in that I will be 59 1/2 before my rate can escalate out of control and can access 401(k) funds without penalties to pay my mortgage down to the point that I can get a conventional (non-penalty higher rate) approved.

In short, the LIBOR that my variable rate mortgage is based on is at historic lows, so why not just let it reset and save a ton of money without the HARP route? As long as the LIBOR has taken to gradually ease down, I can’t imagine it shooting back up over several weeks or even months before I can make a move.

Another important note is that I have around $10,000.00 of consumer debt that is at 12 to 14% that I intend to payoff over the next year or two with the money that I will save on the relieved mortgage payments.

It’s much more logical to use the money to pay down that debt than the wisdom in gaining a similar amount of equity in the home with a conventional mortgage that would cost me $3,500.00 to buy into.

What say you?

Based on what I see I have a couple comments.

  • You must always watch out for yourself in financial transactions.
  • Mortgage lenders get paid by each mortgage they close so it makes sense they’re pressuring you whether or not it is the right move for you.
  • Increasing costs seem fishy… you might want to ask what exactly has changed and get a good explanation on it if you plan to go forward.
  • No one can read the future. While it may seem highly unlikely that there will be a rate spike, you never know what could happen. If rates go up and you lock into a conventional mortgage later on you might be locking in at a higher rate.

So what are your thoughts? Should this reader refinance their mortgage or not?

photo by: 401(K) 2013

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. Seeing that you plan on only being in the house for 3 years, it doesn’t seem to make sense to refinance. Just looking at the closing costs of $3,500, you would have to have your monthly payment drop by $97 to just break even in three years. If the closing costs are $2,300, then you would need to have a monthly payment that is $64 lower than currently.

    In addition to this, as you’ve pointed out, rates are at historic lows. Based on what the Fed has said about keeping rates low, I don’t foresee rates increasing until 2015-2016 which is right around the time you will be looking to sell.

    Based on what you have said, I would not refi and just let the rate reset. But that assumes you are selling in three years. If it turns out that you aren’t going to sell, then you need to reconsider the calculation. (Note that there are many factors that determine when you should refi and I can only make the above suggestion with the information given.) Hope this helps!!

    • The hardest part about these situations is that there is always the potential for something you aren’t seeing. Thanks for giving advice based on what is known so far :)

  2. If you’re planning on paying it off in 3 years, then the interest savings in that time would probably not be worth it compared to the fees. You’d really have to have the LIBOR rate skyrocket for that to happen, I think. Plus, Bernanke had previously said the fed rate would be low into 2014… and that’s about half of your 3 year time horizon.

  3. If he only plans on being in the house for a ‘few’ years, I would classify that as 3-5 years. I wouldn’t see interest rates spiking all that much at least on the shorter end of that, but you never know. At a certain point if they payment goes up $100-200 a month, that closing cost money could be ‘unsaved’ quickly. It’s a gamble. I think I would stick with low interest rates and not refinance. The deficit is bad enough as it is and higher interest rates would mean more interest payments on the debt, and you can bet the Fed and government will do everything they can to keep those rates low for the foreseeable future.

  4. I would agree with the previous comments and would probably advise against the refi. Rates should be low for another year or so, per Bernanke, and since they’re not planning on paying it off I would have to say it would not be wise. The raising of the costs seems fishy to me as well.

  5. Since I just an article about not paying off a mortgage at these low rates, I suggest any extra funds go to reducing the consumer (credit card) debt. How sure are you that you will move in just a few years?

  6. Justin @ The Family Finances says:

    I”m in agreement with the other commentors. If the person is planning on moving in 3-5 years anyway, I wouldn’t bother with a refinance. Just let the current mortgage reset at today’s super low rates. Using the saved money and paying off the consumer debt at 12-15% interest sounds like a good idea.

    With the Fed promising to keep rates low until unemployment reaches 6.5% and general estimates of that being in 2015-2016, you should be safe as long as you sell the house before rates start rising.

  7. “Since I don’t plan to be in the house more than 3 years at the most, I don’t see the point in investing in the new mortgage.”

    It seems that you have already made your decision. If you do not plan on staying in the house for more than 5 years, I would say that refinancing is not a good option.

  8. OK, I’m confused. We recently refinanced our (not underwater, not behind on our payments) mortgage thru harp2. They solicited us and there were 0 fees involved – as in zilch – not one dime. Has this program ended or why am I the only person I know who has done this? It was completely painless. We read several pages of closing docs, initialed them and the bank took care of the rest. We were able to drop our interest rate from 5.75% to 3.25%.

    • I don’t know much about HARP but if that is the case the reader who asked this question definitely needs to do some more investigating into what he is really being offered. Regardless, it sounds like you got an awesome deal Jim. Congrats on refinancing!

  9. I agree with Jon. Refinancing only makes sense when you plan on being somewhere long term. You pay too many fees that aren’t worth it in the short term.

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