Q. Two years ago we took out a 5-year, interest-only mortgage on a $207,000 home. The interest rate is 5.25 percent. We have been paying $500 a month on the principal, which is now $202,562. The home was recently appraised at $227,000. With rising interest rates, should we consider refinancing now? Or should we continue on this course and refinance at the end of the 5 years?

---D.W., by email from Houston, TX


A. If we knew what home mortgage interest rates would be three years from now, that would be an easy question to answer. But we don't. The best any of us can do is look at the options we face and pick the one that seems best. The operative word is "seems."

So let's examine your options.

--Refinance Now. If you refinance now to a fixed rate mortgage you face closing costs and fees plus a higher interest rate. According to Bankrate.com, for instance, the average 30 year mortgage now costs 6.30 percent. Using the mortgage search tools on that website I found that the stated rates for 30 year mortgages in the area ranged from a low of 5.875 percent to a high of 7.125 percent. Fees to place the loan ranged from a low of $295 to a high of $8,513.

Needless to say, those fees can raise the effective interest rate. Worse, the shopping process ranks up there with the trauma of car buying.

--Hold your current mortgage.   If you wait, you will save refinancing costs plus about 1 percent a year on the interest rate. That's about another $2,000 a year. In addition, you'll pay off about $18,000 of principal over the next three years.

So whatever your interest rate is when the mortgage resets, you'll be paying interest on about $184,000. This is important because it reduces your exposure to dramatically higher payments. Suppose, for instance, that the mortgage resets to a variable rate that starts at 7 percent over the remaining 25 years. Your monthly mortgage payment would be $1,300. That's less than the $1,386 a month you are now paying on the interest only mortgage with an additional $500 principal payment.

Could variable rate mortgages cost more than 7 percent? Of course. But if they do, you have a big incentive to direct more of your savings to a rapid mortgage pay-down.

--Move. The other option is that you might move in the next three years. If that is a possibility, refinancing would be foolish.

If I was in your shoes, I'd hold.


Q. I am 52 years old with 32.5 years with a large corporation. They are changing the pension system. Until December of this year I have a choice between an annuity of $1,800 a month or a lump sum of $360,000. After December the annuity is the only thing available. I have savings that total about $450,000.

My wife will work another 10 years, and she makes $78,000. Should I take the lump sum and look for work, or should I stay? I worry that if I stay, work for 10 more years and accept the annuity, the corporation could arbitrarily reduce or eliminate the annuity. I would like to work somewhere for at least 10 years. I just hate to leave that lump sum on the table, and I don't trust my company to keep its promise in the future.

---M.G., by email from San Antonio, TX


A. A corporation with a defined benefit pension plan can't "arbitrarily" reduce or eliminate it. They can "freeze" the plan and stop the accrual of new benefits. But they can't just chuck the plan and its promises.

If a full and unemotional re-assessment of your employer still ends with a low level of trust, however, you would be better off working elsewhere, particularly if you are eager to be "repotted." (The change will be easier if you can find another job that pays as well elsewhere, if your wife's job is secure and pays more than yours, and her job can provide your health care coverage--- a lot of ifs.)

Your $810,000 ($360,000 lump sum plus $450,000 current savings) will provide a sustainable annual income of about $32,000, assuming a withdrawal rate of 4 percent. You would have to earn something over $35,000 to have the equivalent income from work.

The private pension crisis hasn't been in the news much of late but it's still there. Pension funding, as measured by the Ryan Labs indexes, has improved this year, but pending legislation is likely to make defined benefit pensions even less attractive to corporations than they are now.