Refinancing ARM Mortgage Loan

Added January 24, 2007 by Ilyce R. Glink

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Summary: When deciding whether to refinance it takes more than just considering the duration of the loan and the interest rates. You have to calculate whether you can earn back the money you spent on points (a point equals 1 percent of the loan) in enough time to make it worth it to refinance. Paying too many points to refinance a mortgage with a small interest rate change may not make sense.

Q: I met you at the Smyrna, GA, jonquil festival this fall, you were very helpful! I need your advice: My adjustable rate mortgage (ARM) is expiring next month. The rate for the 30-year mortgage option is 5.875 percent.

I am thinking about going with a 15-year fixed rate loan. I got a quote of 5.75 percent with 2 points, and was told that my closing costs would be $5,000. Should I pay points? I plan to live in the house for approximately 10 more years.

A: Here's how I feel about paying points when interest rates are flirting with 30- to 35-year lows: Typically, if you can "earn" out your points with the savings in the mortgage rate within a year, it's a good idea to pay the points.

In your case, the lender wants 2 points to reduce your rate by 1/8 of a point. That seems too high. If you take out the 30-year loan and make the payments on the loan as if you had taken out the 15-year loan, you'll probably come out ahead. Especially if you use the 2 points that you would pay for the 15-year loan to get a smaller 30-year loan.

I'm glad you came out to the Smyrna festival. It was fun, wasn't it? I had a great time.

Jan. 24, 2007.

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