Transcripts

Money File: Menacing Mortgages

SUSIE GHARIB: In the "money file" tonight, rising mortgage rates aren`t just a problem for home buyers. They`re also a problem for homeowners who might want to refinance. With some guidelines on that decision, here`s Eric Schurenberg, managing editor of "Money" magazine.

ERIC SCHURENBERG, MANAGING EDITOR, MONEY MAGAZINE: To afford a home during the bubble, a lot of people took out fancy mortgages -- ARMS, hybrids, interest only. If you`re one of them, today`s rising rates are forcing you to choose between refinancing and standing pat. Here`s how to think about it. Do you expect to move within the next few years? If so, it`s easy. Stick with the loan you have rather than shoulder the closing costs of a refi.

But if you plan to stay put, it gets trickier. You should refinance if you have a fixed rate mortgage over eight percent; 30-year fixed loans are now at 6.2 percent, grab one -- or you have an arm that adjusts monthly. If so you`re really feeling the heat of higher rates -- time for plan B. Same if you have a hybrid ARM that starts adjusting within 12 months. You`re facing sharply higher rates, soon. Time to bail.

Now you should stand pat and keep your current loan if: you have a fixed rate mortgage under 8 percent -- yes, you could get a lower rate, but it wouldn`t justify the closing costs; or you have a hybrid ARM that starts adjusting in 36 months. In three years, interest rates may be headed down again, and you`ll be fine. Now, the decision isn`t so clear cut if you have an interest-only mortgage or a hybrid that starts adjusting between 12 and 35 months. Time for a gut check. If you`re comfortable gambling that rates will fall back by the time your loan resets, stand pat. But if rising rates are keeping you awake, refinance to a fixed rate and take the higher payment you know over one that might be worse. I`m Eric Schurenberg.