SOLVED: Should We Stick With Our ARM?

Before you consider switching to a fixed-rate mortgage, look at how long you plan to stay in the house.

By Kimberly Lankford, Contributing Editor

From Kiplinger's Personal Finance magazine, September 2006

Homeowners whose one-year adjustable-rate mortgages are about to rise may still be better off keeping the loan rather than switching to a fixed rate. It all depends on how long you expect to live in the house.

For example, if you'll be moving in a few years and can afford to make higher payments in the meantime, you'll avoid refinancing costs and a prepayment penalty for getting out of your ARM. Even after the first adjustment, some ARM rates are still lower than current fixed rates.

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But if you think you'll be in your home for a while, you may want to compare your current rate -- and possible future increases -- to a fixed-rate mortgage or a hybrid ARM with a longer period before the rate adjusts, such as seven or ten years. Current rates on long-term loans are still reasonable.

"If rates go up, locking in is a smart decision," says Michael Kozak, a financial planner in Marblehead, Mass. "If rates go down, you always have the option to refinance." (Run the numbers at calculator 3e at www.mtgprofessor.com).

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