Refinancing out of an adjustable-rate mortgage (ARM)

As interest rates rise, some homeowners are jumping ship -- abandoning storm-tossed adjustable-rate mortgages for stately fixed-rate home loans.

What makes this phenomenon unusual is that, by switching from adjustables to fixed-rate loans, these borrowers are opting for higher rates -- for now, at least. It's more common for people to refinance into lower rates.

These homeowners give three reasons for tacking against the wind. First, some refinance after deciding to keep the house longer than they originally intended. Second, some refinance because it's easier to make firm plans for the future if their mortgage rates can't fluctuate. Finally, some have simply changed their minds about mortgage rates, and think they're headed up for a long time.

Matt van Wyk is refinancing for all three reasons.

"To me, it was a question of, 'Do I want to sleep at night?'" says van Wyk, 33, of Deephaven, Minn. With his highly caffeinated mortgage, an easy sleep is hard to come by. He has a one-month LIBOR -- an adjustable-rate mortgage, or ARM, that can move up and down rapidly. He got his mortgage in December, and in the four months since, his rate has gone from 3.75 percent to 4.375 percent, with no end in sight.

That's the way of the volatile LIBOR, which has risen about 1.8 percentage points in the last year. When van Wyk bought his house, the one-month LIBOR gave him the lowest rate he could get. "A LIBOR was perhaps a solution to buying a little more house than we could have afforded with a single income," van Wyk says. But the LIBOR's rapid rise has been scary. Van Wyk figures he will rest easier after he closes on a 30-year fixed-rate mortgage at 6.125 percent.

From a Ferrari to a station wagon
Now, switching from a one-month LIBOR to a 30-year fixed is like trading in a Ferrari for a station wagon. It's like breaking up with a rock star to marry an actuary. And to make the change after just four months, incurring a prepayment penalty -- well, you wonder what was going through van Wyk's mind. Did he make a mistake?

Van Wyk says it wasn't an error, but a change of mind. "After four months, we kind of started thinking we're pretty much going to be here for the foreseeable future," van Wyk says. "When we moved here it hadn't quite sunk in that this would be the place."

The van Wyks' home is about twice the size of the one they owned before. It's in a suburb built around a lake west of Minneapolis, a five-minute drive from his parents. They have a 15-month-old child, with another due in September, and the house is big enough to accommodate a family of four. Why not settle there for a long time?

So the family decided it would simplify their planning if they could count on the mortgage payment staying the same month to month. So they chose a $304,000 fixed-rate loan. It will have an interest-only option, allowing them to slide by during lean times. "I expect the next four or five years to be skimpy anyway," van Wyk says.

He is staying with the same lender, who is charging two months' interest as a prepayment penalty for refinancing out of the LIBOR, but waiving the closing costs on the 30-year fixed. Van Wyk believes that, over 30 years, the one-month LIBOR is a money-saver. But right now he is focusing on getting through his children's preschool years, making medium-term rate stability a higher priority than long-term savings.