Refinancing Question

[nolamd84]

Hey everyone, wife and I have around 190k in student loans at 6.55%. We have two offers of refinancing for 5 year terms - 2.47% variable and 3.95% fixed. Thought on the two? The variable rate has no cap. Struggling on the decision. The cost over the five years is roughly $5,000 with some increase in rates projected. Scared of the possibility of rates shooting up to the 6-10 range or higher.

 

 

[Dicast]

Difficult decision. If you plan to pay them off in 2 years then the variable seems like a no brainer. If you are planning on 5 years then the risk of rates going up is worse, but your remaining principal in years 4-5 should be a lot less even if rates go higher than the fixed rate of now. Any day now my wife's employer is supposed to confirm her employment with sofi and we are going to refinance her 148k into a variable with plans to knock it out in a year. I got mine fixed at 3.5% 18 months ago and dont feel too bad about it though.

Never trust predictions of the future but it seems like the fed isnt quite ready to push rates up themselves. I am convinced though that a lot of the available money for student loan refinancing has been absorbed and companies like drb are raising rates just to slow down applications and intice more investors.

[nolamd84]

I think I'll probably go for a fixed rate because its a low enough interest rate for me to not pour all my money into them and gives us the luxury of saving for a house (I know that you could just pour all your money into it regardless, but I like the flexibility).

[somethingmorethanfree]

We are in a similar situation, did refi a year ago. Can you find an offer with a capped rate on variable? I think ours with Earnest was about 3% variable for 5 year term with roughly 9% cap? It would take a big swing in rates to reach the cap, but good to know it is there. We felt like with a 5 year term, we are OK wit the variable rate because of all the savings - with a longer term seems riskier.

[Zaphod]

I would choose variable, hands down every time in this environment. It would take a considerable jump in rates (aka growth of the global economy) to make it not worthwhile over a 5 year term. These things dont happen overnight either, if that looks to be the near future you can always refinance into a fixed for the rest of the time.

Can you not choose a company with a rate limit, I think SoFi has an upper limit near 9. In reality, that would mean inflation/wages/etc...should all be inflated and net effect should be nil, but still try one with the limit. Who are you considering?

[Sergio Estavillo]

Most of these loans are indexed on LIBOR (London Interbank Offered Rate) which has a moved up. If your payoff is 3 years or less, I would select the variable. Google LIBOR rates WSJ as I can't paste the link.

[Zaphod]

Point is that it would take quite a sustained and long ramping increase in rates to not be worthwhile and eliminate the savings. Right now this means every payment more is going to principle, and even if the term ends up at a higher rate in the last year or months than the fixed option it would be on a smaller principle balance at that time. You have to think about it in average weighted rates really, sequence of payments, break evens, and whats likely.

I find it hard to believe over a 5 year period you will lose by going variable, but anythings possible I guess. In most interest rate situations a variable wins out.

Rates stay same/similar-variable

Rates decrease-variable

Rates gradually increase-variable

Rates increase dramatically-fixed

While people have been calling for dramatic rate increases for decades, rates have fallen for more than 30 years since. Trend is your friend.

[d2rx]

I would go with variable if you plan on paying it off within a few years. I did a refi 9 months ago with DRB. $172k @ 3.35%, currently @ 3.61. Was offered 4.5% fixed. My current balance is $139k. I am in the process of refinancing again @ 2.25 variable. I think it's worth going with variable, considering how much you will save in interest. Another thing I do is check out the interest rate forecast. My plan is to refi again if the rates raises too fast, to above 5%.

http://longforecast.com/libor/libor-forecast-for-2015-2016-and-2017.html

 

[somethingmorethanfree]

D2RX, I am in a similar situation. If you don't mind sharing, I'd like to know where you were offered that rate / how you got it. Currently at about 3.1%/5yr, similar loan size. Would love to get down to 2.25 or so as you're being quoted. Thanks!

[childay]

I would and did go variable.  If rates go up just pay off sooner than expected.  Depending on your cashflow of course.

[nolamd84]

Sure - I went to credible.com and found the best rate. It worked pretty well and I got my documents within a week.