Analyze risks, then make your decision

Q My husband and I are in our early and middle 50s. We have one child, a junior in college. I have been not working since September (unemployment plus a very part-time job).  

He wants to refinance for a 10-year fixed loan including pretty much all but my student loan (for tax purposes). We have done pretty much what we can to keep expenses down. We are doing pretty well. I am suggesting that we target certain bills, knock them off, see how we are doing in six months, then revisit the refinancing. I'm certain I'll have a job and my income will be used to pay down bills and for savings. Thoughts?

KATHLEEN

A You're money conversation highlights a fundamental divide in life and in personal finance: the trade-off between taking actions that create greater financial certainty now vs. keeping your options open as long as possible.

Clearly, it's an opportune time to refinance. Mortgage interest rates are heading lower. According to Bankrate.com, the national average for 30-year fixed rate mortgages is 4.37 percent, down from 4.52 percent last week.

Yet as you say, there's a good chance your monthly cash flow will improve significantly over the next two years. You will get a bump when you get a job.

Here's the thing: There's no right or wrong between the choices you and your husband are considering. The really intriguing and difficult personal finance choices are when values collide.

One way to think through a decision like this is to focus on risk or, more accurately, which risks you're more comfortable living with. It's an approach I learned from the late Peter Bernstein, a great translator of modern finance theory into eloquent books and other writings. For Bernstein, the key question is: "What is the downside? What could go wrong?"

For instance, the lure of keeping your options open is that you'll get rid of the bills and add to savings when you get a job. What if you don't? What if interest rates skyrocket while you're looking for work? Then again, if you put all your debts on your home (except student loans) are you putting your house at risk if you suffer a major financial setback? That's what happened to so many homeowners in the 2008-2010 home implosion. If the U.S. economy sinks back into recession which choice will make it easier for you to weather the storm?

Carefully think through the downside as well as the upside, and then make your choice.

Chris Farrell is economics editor for "Marketplace Money." Send your questions to cfarrell@mpr.org.

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