If you have an adjustable rate mortgage (ARM) you have probably been bombarded with solicitations and exhortations to “fix it” before rates go sky-high. You are right to be concerned about the future but jumping into the nearest fixed rate mortgage could be a costly move.

Looking at recent ARM rate adjustments tells the story. Rates for many ARM borrowers have decreased lately. Before making any decision about refinancing to nail down a stable rate, get out your loan documents, find the Adjustable Rate Mortgage Rider, and look up the terms of your ARM. Locate the index that your rate is tied to (for example, the LIBOR, COFI, or T-Bill). The index is a published financial indicator and you should be able to look up its value easily online. This week’s 6-month LIBOR, for example, is 2.88%. Next, find the margin that your lender adds to the index to get your interest rate. If your loan is based on the 6-month LIBOR and carries a margin of 2.5%, your rate would be 5.38% if adjusting today.

OK, but what if a lender calls you up and says you can get a fixed loan at 6% right now? Should you go for it?

That depends. While rates are near historical lows and it seems more likely that they will increase than decrease, your time frame and the terms of your existing mortgage play a big part in the decision to fix your rate or let it ride. Do you have a subprime loan, and have you improved your credit enough to be able to get into an FHA or conventional loan? Then a new mortgage is probably a smart move. But if you have a decent mortgage and your plans include moving in the next couple of years it probably makes more sense to leave it untouched. Refinancing can cost thousands of dollars — money you are unlikely to recoup if you don’t plan to keep the property for more than a couple of years.

A good loan officer can tell you what you could expect to save (or not save) by refinancing to a new mortgage and how long it will take to recoup the costs. Online mortgage calculators can also provide this information.

Tags: adjustable rate mortgage, ARM home loan rates, ARM mortgage rates, fix ARM loan, mortgage calculator, refinance, refinancing

This entry was posted on Wednesday, May 7th, 2008 at 9:33 am and is filed under Daily Pick. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.