A: Your question raises several important real estate issues.

First, let’s talk about your current loan.

The LIBOR index is based on the London Inter-Bank Offering Rate, which is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity. Because the European economy is in a slump right now, there is less demand for loans in their business community. As a result, the LIBOR rate has been and continues to be very low. However, the largest trading partner for the Europeans is the United States, and our economy is booming right now.

As our economy picks up steam, it is only logical to expect that the European markets will benefit as well, causing increased demand for short term loans. This will likely cause the LIBOR rate to rise, and perhaps dramatically.

When the LIBOR rate hit rock bottom, home lenders decided to push adjustable rate loans tied to this index because they seem low. But most of these LIBOR loans have no caps or ceilings, meaning that the rate can increase by any amount on an adjustment date. This is an extremely unattractive feature of any adjustable rate product, and LIBOR loans typically adjust once every six months.

The LIBOR rate hit bottom on March of 2004, and has been rising slowly, but steadily ever since. If you are lucky, the increase over the nest two years will be slow rather than steep, and your increased interest expense will me relatively small.

In addition, most LIBOR-based home loans are "interest only" loans, meaning you have the lowest possible monthly payment, but you are making no contribution whatsoever to principal reduction. There is nothing inherently wrong with this type of loan, but any loan based on an unpredictable rate index with no limits on increase is not a good basis for long term ownership.

There are two additional factors which influence your situation: your equity position and your expected length of continued ownership.

With a home value in the half million dollar range, and a loan balance of less than one-third that amount, you have substantial equity in your home. This is an extremely strong position, and allows you quite a bit of financial flexibility and protection.

For example, if the economy went into a serious recession, and your home actually lost some of its value, you would likely be OK. While it’s never good to see equity evaporate, you have so much equity that you would probably be unaffected. Likewise, even if interest rates rise quickly, your loan balance is such a small percentage of your home’s value that the payment increase would likely cause you little real trouble. You have so much equity in your home that you probably could "wait out" any temporary market conditions.

That brings us to your future plans.

With only two more years of expected ownership, the impact of your adjustable rate loan is limited to the damage that the LIBOR rate can do in that twenty-four month period. Once you decide to sell, your volatile loan will be paid off and no longer be a concern.

Based on my examination of the LIBOR rate index over the past fifteen years, I suspect that the rate may rise as much as two full percentage points over the next couple of years. This is, of course, crystal ball gazing and may be entirely wrong, but my prediction is in line with past periods of increase in the LIBOR rate index.

Based on that scenario, I recommend that you avoid the additional cost of a refinance at this time. You may wish to consider a "zero closing cost" refinance, which would likely add about three-quarters of a point to your interest rate, but would lock in your rate. Unfortunately, that would likely cause your payment to increase, and that contradicts your stated goal of keeping payments low.

Another option would be to approach your local community bank, and request a 24 month interest only loan at a fixed rate. Because your loan-to-value ratio is so low, you would probably be able to borrow for that period at close to prime rate, and know that your payment rate can not increase.

If your current rate is substantially below prime rate, I would seriously consider simply staying with the loan you have. Because you will be moving fairly soon, it’s simply not worth making a change.