Loan Refinance Advice - variable vs fixed

[stskay]

Looking to refinance my student loans ~$340,000 at 6.8%.

Best offers I have are from SoFi, looking at the 7-yr term my options are:

Fixed        ~$4,598.35/mo @ 3.875%  = total $386,261.40

Variable    ~$4,481.78/mo @ 3.115% (cap 8.95%) = total $376,469.52

Overall savings if variable rate does not change is $9,791.88 (difference of 0.76% rate)

I've read on this site before (https://www.whitecoatinvestor.com/fixed-versus-variable-loans/) about the arguments in favor of variable loans; that basically the odds are in your favor that you will save money. However, when this was written, the incentive for choosing variable loans was much greater, closer to 1.5 - 2% difference in rates offered, allowing for greater fluctuations in inflation in order for the variable option to win out.

Is the overall savings (~$9,800 over the term of the loan) worth the increased risk of the smaller difference in interest rates, 0.76% vs 1.5%, currently now offered between the two options? Are the odds still in the variable term's favor?

Thanks.

 

 

 

 

[Dreamgiver]

You be the judge of what that risk is worth to you. iMO, the risk in your case is not worth the small gain and would go fixed. I have refinanced twice with variable rate loans but the loan was smaller than yours (now I could just pay it off if the rate skyrockets) and the rate difference much greater.

[DMFA]

If you're choosing 7-year and not 5, then I'm assuming you're actually planning on sticking to the amortization schedule and should take the fixed rate.

Otherwise, were you doing it over 5 (esp if faster), you want the rate lowest when the principal is highest and would do variable...but you're not. The variable rate changes with LIBOR every month and can have some pretty big fluctuations.

[Craigy]

+1 for going fixed if you plan on just making the minimum payment each month.

Like DFMA said, most (all??) of these products are tied to LIBOR which can go up and down seemingly irrespective of what the fed target rate does.  Some of these companies adjust every 3 months, some every month, and over a short period you can find that your .76% spread has evaporated and you're now at the whim of the market.  Most of these companies don't adjust your rate down unless you contact them and ask (good luck).

One thing I would definitely suggest is making sure you're getting the best fixed rate you can.  Check out earnest, elfi, citizens bank which offer pretty competitive rates.  They can give you a rate quote without a hard pull.  Also, you can message/email/call and ask them to beat a competitor's rate.  Earnest advertises their best fixed rate as 3.35% and elfi 3.19% right now, likely a little higher for 7-year term, so you might be able to shave a few tenths from that sofi offer.

If you think you can manage to throw extra cash at the loan each month and have it paid off early, it makes taking the risk on a variable loan a much easier proposition.  That said, putting ~$4,500 a month on your loan is already pretty healthy so it's pretty understandable if you don't want to squeeze yourself much more than that.

[stskay]

Thanks for everyone's input. Will try contacting a few providers directly and search for lower rate.

 

[Dreamgiver]

FYI, to give you an idea of the LIBOR adjustments, the previous adjustable loan I had with Earnest went from 2.5 to 3.1 in 13 months. LIBOR was at an all time low about 2 years ago. Slowly rising since then. I don't believe it is going to skyrocket or anything like that, but you can expect a slow upward move.