To Refinance or Not to Refinance: That Is the Only Question

(MoneyWatch)  It's clear from my email and the callers to my radio show that last week's drop in the 30-year interest rates to about 4.75 percent has sparked huge interest in whether now is finally time to refinance.

Refinancing our own home loan (and other properties we own) has become a regular topic at the dinner table. We know we need to do it. And, we know it's probably time to put in an application.

It's just that when you're already paying 4.1 percent, and you know the interest rate is going to fall to somewhere around 3.5 percent when the loan adjusts, it's tough to think about paying more each month in the short run, even if it is a good long-term financial decision.

Here's how my husband, Sam (a real estate attorney who works on residential and commercial deals and co-writes the Ask The Real Estate Lawyer column with me each week), and I are parsing the situation: Our current mortgage is a 5/1 ARM that is at 4.1 percent. We expect that when it adjusts in a few months, it'll drop to about 3.5 percent. The loan can only go up 2 percentage points in a single year and is capped at 6 percent overall. So in a worst case scenario, we're looking at paying 3.5 percent in the next year, and 5.5 percent the following year. Our risk? A loan that would cap off at 10.1 percent -- which is still less than the interest rate we paid on our first mortgage, which was 11.75 percent on a Lake Shore Drive co-op we owned some 20 years ago.

But who really wants to pay 10 percent or anything close to it? While we're safe for this year, and maybe for a second year at around 4 percent or less, the truth is that once we're out of the current economic mess, interest rates will go up. If they only go up to 6 percent, we'll be fine. But some folks think we're in for a spell of hyper-inflation. So, refinancing now makes all the sense in the world.

Remember those 18 percent interest rates of 1982?