Exchange ARM for Fixed-Rate Mortgage

NEW YORK – Higher short-term interest rates mean payments on many adjustable-rate mortgages could surge. And with the 30-year rate hovering around 6.3 percent, now is the time to exchange your ARM for a fixed-rate mortgage.

But if you're not sure you'll keep the house you're in, how can you take advantage of current low fixed rates without committing to a 30-year mortgage?

Look at a so-called 5/1 ARM, suggests Greg McBride, a senior financial analyst at Bankrate.com, a North Palm Beach, Fla.-based company that tracks mortgages for consumers.

Hybrid ARMs, which include 5/1 and other loans, give you a fixed rate for a set number of years, in this case five, at which point the rate becomes adjustable once each year. Right now, that fixed rate is around 6 percent.

There are also 3/1, 7/1 and 10/1 ARMs, with the 5/1 being the most popular. The longer the fixed-rate period, the higher that rate will be as it approaches the 30-year benchmark.

"The fact is an ARM that you took a year ago could easily adjust to 6.5 percent or 7 percent at the next adjustment," warns McBride. "Contrast that with the ability to lock in 6 percent for the next five years."

And, he adds, if changing homes is a certainty, refinancing your current ARM into a 30-year mortgage is "like paying for insurance you don't need."

There are, however, some downsides to consider. If you're moving in the next year or two, the fees for refinancing your mortgage may negate any savings from the lower interest rate of a 5/1 ARM.

"Make sure you're in your home long enough to recoup those costs," McBride says.

Also, if your income is growing faster than your adjustable rate, you may simply want to stick it out.

But for anyone else looking at higher ARM payments who thinks he will be in a new home five or 10 years from now, swapping to a 5/1 is a good move to make.

When refinancing, it makes sense to approach your own lender first. If your current ARM is recent, the bank should have your information readily available and may be eager to keep your business.

But don't count on a free lunch, McBride says. Arranging loans costs banks money and you won't be able to wiggle out of those fees.

As always, make sure you know what you're getting before you sign up for a loan. Bankrate.com offers an interactive mortgage calculator and a lender database that compares rates and fees. Both services are free of charge.