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Dear Liz: Should my retired wife (age 74) and I (age 78) refinance our home just to lower our monthly payment by $100? I’m considering going for a five-year fixed at 2.74% followed by a 25-year variable. Our outstanding loans amount to $200,000. The value of our home has decreased to $400,000. My wife is fearful of the 25-year variable.
Answer: As she should be. According to mortality tables, she’d have to live with it longer than you will.
You two are old enough to remember the double-digit inflation of the 1970s and the havoc that wreaked. If inflation like that (or anything close) were to return, your mortgage payment could quickly become unaffordable.
Economists are concerned that all the cash that’s been pumped into the economy to fight the downturn could spark inflation if growth resumes. Too much cash chasing too few goods is what traditionally has led to serious inflation.
In any case, lenders know that today’s record low interest rates won’t last. That’s why they’re so eager to push loans that will become variable at some point — so that the borrowers will be the ones to shoulder the interest rate risk.
Some borrowers can take that risk, but they tend to be younger folks whose incomes are also likely to rise if inflation returns. For people on fixed incomes, the math really doesn’t work.
Do yourself and your wife a favor. If your current loan has a fixed rate, stay with what you have. If it doesn’t, consider refinancing to one that does.