First person: My (unexpected) success refinancing to a variable-rate mortgage

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First person: My (unexpected) success refinancing to a variable-rate mortgage

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First person: My (unexpected) success refinancing to a variable-rate mortgage

In August 1997 I purchased a small, 868-square-foot home for $52,999 with a fixed interest rate of 6.875 percent and no down payment, since I was a first-time homebuyer. I was so proud of my accomplishment. I had what many considered a low interest rate and a great payment of $475 a month; a beautiful 1.11-acre parcel of land; and a home residing off a private dirt road with a pond in front of me and the deep woods of Maine behind me. When I bought my home I was the happiest I had ever been in my life.

Then I got divorced.

I got to keep my home because it was in my name. I also got to keep $10,000 in other debts. That's when I decided to refinance.

In April 2004 I refinanced my home mortgage through a bank that I had been with for over 10 years. It was easy. The only expense to me was $200 for the appraisal of the home, which, lucky for me, had a new value of $92,000. I refinanced $78,000 over a 30-year term with closing costs built into the loan. I paid off my bills and banked $16,000 for home improvements. The interest rate was much lower at 5.25 percent. My payments went up slightly, but I got to walk out the door debt free.

There was a catch.

I had to refinance at a variable interest rate. The contract stated it would stay at the 5.25 rate for three consecutive years. Then, each April, starting on the fourth year it would change to a variable rate with a stipulation of not being able to go lower than or raise more than 2 percent of the current rate per year. The rate could also go no higher than 12 percent. I figured in three years I could refinance again at a lower fixed rate.

Three years came and went.

I was unable to refinance because my debt-to-income ratio was too high. In other words, although I had excellent credit, I owed too much compared to my income to be able to refinance again. I decided at that point I could stick it out one more year. What's the worst that could happen? It could go up to 7.25 percent?

April of the fourth year came and I received a letter from my bank regarding my mortgage. It stated that according to my contract I was now carrying a variable interest rate. With fingers crossed, I read the letter to find that my interest rate was changing -- but it wasn't going up; it was going down! In 2008 my home mortgage interest rate dropped to 4.25 percent. I was ecstatic!

My luck kept coming.

Due to the economy the interest rate on my mortgage kept getting better. Each year in April I would tell myself I could stick it out one more year with the variable rate on my loan. I figured it was once at 6.25 percent. If for some reason things got bad, I would refinance again but for now, I could use the time to pay down debts and eventually reach a debt-to-income ratio that would allow me to refinance. Last April, when my letter came in the mail, I opened it slowly and dreaded the contents inside. To my amazement my interest rate had dropped again, this time to a low 3.25 percent. It can't possibly get any better, I thought. It will either stay or go up next time for sure.

In April of this year my letter from the bank came to me with an interest rate of 3.125 percent. I have an incredibly low payment now of $500 a month that includes my homeowners insurance and taxes. You can't rent for that cheap anywhere in my area.

The last few years have been good to me financially. I have paid off over $12,000 in debt, completed numerous home improvements, and lowered my expenses to a meager six bills: mortgage, car payment, car insurance, electric, phone, and Internet. My debt ratio is considerably lower to the point that I have, in the last few months, acquired a credit card and have also been able to purchase a scooter to ride to work, which saves gallons of gas. I have some savings in the bank. I did stop by my bank last week to inquire about refinancing but lucky for me the loan officer shared with me she had just attended a big conference and her superiors don't foresee a rise in the interest rates until at least 2014. That's good news for me. I have chosen to keep my variable rate for a few more years rather than have to refinance.

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