Posted on 09/21/2005 3:53:47 PM PDT by Mrs. B.S. Roberts
The likelihood I would do so is vanishingly small.
However, I frequently make use of a HE loan on my principle residence to cover the carrying and construction costs on rental properties I'm rehabbing prior to refinancing with a fixed term loans after completion - it's just simpler than going construction loan route and I need only draw what I need as I need it.
In any case my general point was that the answer to the question asked above depends a lot on individual circumstance.
Homeowner A has is having a rough time making the current payment on a 1st plus a HE, no savings or liquid investments, and believes there is a good chance that interest rates will be going up a lot over the next few years while his income will not. In this case it may be rational for him to roll HE into a larger fixed rate 1st on which he can just make the payment, accepting the fact he they will end up paying more in interest over the life of the loan to lock in a manageable monthly outlay.
Homeowner B is in the same situation, but has twice the amount of the HE in savings or liquid investments. For other reasons in her financial circumstances it may be rational for her to run the risk of raising rates as she has a cash cushion to cover a possibly rising rate on the HE and in any case can retire it in part or full anytime she decide it makes financial sense to do so.
So both decisions could be "correct", depending on individual circumstances.
Lock in a fixed, before you find yourself paying 10% or higher in coming years on your ARM!
As a mortgage borker, I can tell you that rates have been easing up for almost 2 months now. Also, if your credit scores are in the 700's and you have a DTI (Debt to Income) of less than 45%, you should be able to get a rate of anywhere between 5.75% and 6%.
Just as a little friendly advise, find a local lender (Bank or Mortgage Broker). I would call a realtor you know or a realtor that you know is well respected in your area. He/She will be able to give you the names of a few good resources.
The point I was driving at, as you've obviously deduced, is that it's never a good idea, in my opinion, to carry unnecessary risk. If the money is there, and at least semi-liquid, pay the house off. A paid-for house is the ultimate in family security and peace of mind, and it unleashes a significant portion of your income for wealth creation with lower overall risk. JMHO.
The decision is very simple.
Answer first these two questins.
Will short term rates go lower in the near term?
Do you sleep soundly knowing your payments might go up?
If the answers are no, then refinance at a long term rate, cause it's not much higher than your current rate.
The worst that happens is you have to refinance when rates drop.
In the alternative scenario, the worst that happens is your payments continue to increase.
Are you sure that 7.2% is the best you can do? Can you handle the payments if the rate goes to 9-10%? (if the answer to this is no then get out of the adjustable into a fixed).
Thanks to you and all the great Freepers who helped me think this through. To answer your question, "can you sleep knowing your payments may go up"...NO!
Based on all the collective input, I am going to lock in soon. But I think I'll check a couple of other banks first. Since the Fed won't (I hope) raise the rates in the next week, I have a week or so to do some more research and get some more advice.
Thanks again!
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