Retirement & Financial Planning Report

With an adjustable-rate mortgage (ARM), you pay a certain interest rate for a fixed number of years. That introductory rate is usually lower than the interest rate on a fixed-rate mortgage.

Getting a lower interest rate with an ARM allows you to buy a more expensive house. But ARM rates reset in the future, when they might go up.

One option is to refinance your ARM now, but that may not save you any money. ARM reset rates are pegged to short-term instruments, which are low now.

Suppose your ARM calls for a reset margin of 2.5 percent over one-year Treasuries. One-year Treasuries now yield around 2 percent. Thus, your loan will reset to a 4.5 percent interest rate: 2 percent plus 2.5 percent.

If you refinance to a 30-year, fixed-rate mortgage now, you’d find the average rate is 6.4 percent. For 15-year, fixed-rate mortgages, the average is 5.9 percent.

Therefore, you’d pay much more if you refinance to a fixed-rate mortgage, at least in the short-term. However, refinancing to a fixed-rate mortgage lets you lock in your rate, rather than risking a bump in rates in the next reset. Many ARMs reset every 12 months. Next year, the Fed might not be cutting short-term rates, and your ARM might shoot up.

The bottom line is that refinancing to a fixed-rate mortgage now may make sense if you plan to stay in your house for the long term.