Is It Too Late to Refinance your ARM?

Fixed mortgage rates are inching up, and industry experts are split on where rates are going from here. Can you still afford to refinance your ARM? Can you afford not to?

Being late isn't always a bad thing. It could help you make a grand entrance at a party, or minimize time spent with your in-laws. But waiting too long to refinance your adjustable rate mortgage (ARM) could have serious financial consequences.

Chances are that your ARM helped you qualify for a larger loan, saved you money on the first few years of the mortgage, or bought you some time until that big promotion came through. ARMs may be riskier than fixed-rate mortgages (FRMs), but they can be used quite effectively in the short term. That's because most ARMs have an initial fixed-rate period of one to five years. If you want those low early payments, but not the volatility of a variable interest rate down the road, you can use that fixed-rate period to shop for an affordable FRM.

That's the theory, anyway. In practice, it's difficult to know when exactly to refinance. Obviously, you want to lock in the lowest rate possible. But fixed rates fluctuate based on many mysterious factors: yields on 10-year Treasury notes, the state of the overall economy, the health of the housing market, demand for mortgages…and the list goes on. Even industry experts can't tell you definitively how fixed rates are going to change over the next six months.

Recent trends

The Federal Home Loan and Mortgage Association (Freddie Mac) uses a weekly survey to determine national rate averages for different types of mortgages. As of January 4, 2007, the average rate for a 30-year, FRM was 6.18 percent. Since then, this figure has risen as high as 6.74 percent, before moderating slightly to 6.67 percent as of June 28th.

Had you known that rates would rise from those early-January levels, you certainly would've refinanced then. But now that rates are edging up, you have to decide whether to refinance now or wait still further. In either case, it's a good idea to use a mortgage calculator to help you understand the following dynamics:

• How do the payments on current fixed rates compare to your ARM payments right now?
• How do the payments on current fixed rates compare to your ARM after your rate resets to a variable structure?
• How do small changes in fixed rates affect your payments and total interest cost?

Keep things in perspective. During the last 30 years, the monthly averages for fixed rates have fluctuated between 5.23 percent and 18.16 percent. Relative to the double-digit rates of the 1980s, you can't complain too much about having to refinance for 6.5 or 6.75 percent. But if you keep waiting, you might see double-digit rates again.

You might be too late for rock bottom fixed rates. But that doesn't mean you can't benefit from refinancing now and avoiding the volatility of your variable rate loan in the future.