Mortgage Q&A: Adjustable rate may need fixing

Q.We have two years left on a 4.25 percent adjustable-rate mortgage and are considering refinancing to a fixed rate now that rates are so low. We checked with a mortgage broker, who gave us a good-faith estimate. We discovered that we would need to pay more than $10,000 in points and fees to obtain a fixed rate at 4.25 percent. In order to keep our costs down, the rate would be closer to 5 percent.

I have heard arguments from both sides of the fence. One group tells me to hold off on the refinance because the government is going to continue to cause rates to drop. The other group says that the $800 billion infusion into the economy will cause inflation and make rates rise.

I don’t like the idea of refinancing to a higher rate, but I really don’t like the idea of getting stuck with a much higher rate two years from now. What is your take on this? Should we refinance? The loan balance is $380,000 and the property is worth at least $700,000. We have great credit and good income.

A. On the one hand, you are enjoying a below-market 4.25 percent rate. You are reluctant to give up that rate today because it’s guaranteed for another two years. Even with today’s low fixed rates, 4.25 percent for a 30-year fixed-rate mortgage will require hefty nonrefundable points and fees.

If you sit tight and pay your 4.25 percent, you know you may miss the boat on a low fixed rate if interest rates rise. Indeed, many economists are concerned that inflation may kick in eventually, causing rates to rise and potentially remain high for a long time.

Yet, the government is cleaning up the mortgage mess by purchasing bad mortgages. This, coupled with stricter underwriting guidelines, should create a demand for mortgage investments, which would keep rates down.

This is quite a conundrum. Mortgage rates, which have spiked slightly as of this writing, remain at levels not seen in perhaps 50 years. There is no guarantee that rates will remain this low for another two years. I tend to be more optimistic about interest rates, but no one can predict with reasonable certainty that rates will remain this low for long.

If you plan on being in the property for several more years, I would recommend that you get started on a refinance application. Remember that your 4.25 percent adjustable rate has been well below market for many years. That clearly was a good decision. Now that fixed rates are at historic lows, no one can argue that fixing your rate would be a bad decision. You are playing the mortgage rate game perfectly.

If you plan on selling the house in two or three years, think twice before jumping on the refinance bandwagon. A good loan officer can run the numbers for you so you can make the right decision.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him at henrysavage@pmcmortgage.com.