Mortgage Arm Wrestle

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I refinanced my mortgage about two years ago with a seven year ARM. Would it make sense for me to refinance for a fixed 30- or 15-year loan? Or just wait until the 7-year ARM expires?
–G. Brown, Via Internet

An ARM — short for adjustable rate mortgage — means that the mortgage rate is flexible based on current market interest rates. They are, however, usually lower than a fixed mortgage rate. And so, if mortgage rates are high, you can secure a lower interest rate. But after the set term — in your instance seven years, the rate will increase. Arms best serve someone who plans to own the home five years or less. That’s the only way you would benefit from a lower interest rate.

Refinancing now and then moving before the seven-year period is up will cost you. The fees and closing costs to refinance would cancel any savings you would have from a lower interest rate.

Your inquiry, however, indicates that you are a not a short-term homeowner. According to Matthew King II, president of MK Capital Resources L.L.C. in New York City (www.mkcap “If you plan to stay in the house seven years or longer, it would be worth it to refinance to a 30- or 15-year fixed mortgage rate at 6.5% with 0 points. You could even get a lower payment if you added points.”

Even if the payments on a fixed mortgage rate are higher than what you’re paying now, King says it would be better to lock-in a fixed rate while interest rates are low rather than possibly paying a higher rate after the seven-year period of the adjustable mortgage rate has expired.