Q: I am in month 19 of a 5/1 adjustable rate mortgage (ARM) at 4.25 percent. Should I sit tight and see what happens in 3 years or actively seek a fixed rate mortgage now before the rates become ridiculous?

The maximum my rate can be is 9.25 percent. This is a 30-year loan.

A: The question you have to ask yourself is how much more you’re going to pay by refinancing now.

You got your 5/1 ARM at a great rate. Let’s say the loan amount is $100,000 at 4.25 percent. You’re paying $491.94 per month for your loan for the first five years, for a total of $29,516. You paid $9,326 over the first 19 months, which means you’ll pay an additional $20,200 until the first five years of the ARM expires.

If you refinance your $100,000 loan to a fixed-rate mortgage, the going rate is about 5.75 percent plus 1 percent in points and fees. If you assume a cost-free refinance, your interest rate for a 30-year fixed rate loan would be about 6.25 percent, or 2 percentage points higher than what you’re paying.

Your monthly payment would soar to $615.72, and over the next three and a half years, you’ll pay $25,245, or about $5,000 more than if you stay with the loan you now have.

On the other hand, you’ll be able to lock in at a very favorable rate for the long run.

To figure out which way you should go, you have to start by asking yourself a few questions: How long do I plan to stay in the house? How long do I plan to keep this mortgage? (This answer might change if you decide to renovate or use your home equity to send a child to college.) Will I have trouble sleeping at night if I keep this loan?

For almost all of the past 15 years, mortgage interest rates have stayed below 8 percent, and since the year 2000, they’ve been at 6 percent or below for a 30-year fixed rate loan.

If this pattern continues, then you will benefit financially from keeping the loan you have and simply refinancing to a different loan just before your ARM expires.

Of course, if you can’t sleep at night because you’re so worried about interest rates, you’ll have trouble enjoying it.

Personally, I’d stick with your ARM until you’re in your fourth year of the loan and then evaluate the mortgage market at that time. If rates seem to be rising suddenly, you can always refinance then. The savings you’ve enjoyed will probably make the higher interest rate a wash.

Published: Aug 5, 2005