Dear Dr. Don,
I have had the extreme good fortune of refinancing my existing mortgage back in 2004 into a 5/1 jumbo adjustable-rate mortgage (ARM). The first five years were at 4.25 percent and the interest rate resets annually based on the one-year CMT (constant maturity Treasury) plus 2.75 percent. So my current rate is 3 percent. My question is simple: I don’t want to miss the refinancing window by being a pig at the trough and holding on to my ARM for too long. My principal will be below $417,000 in May and the note reprices in September. What would you do if you were me? The home is worth about $660,000 and I owe $419,000 on the note today.
— Charlie and the CMT Factory

Dear Charlie,
The first question is: How long do you plan to stay in the house? If you have a three- to five-year horizon, then I’d consider taking your chances with the interest rate risk and stay in the adjustable-rate mortgage. With a longer horizon, I’d think about refinancing into a fixed-rate mortgage, or at least another ARM, to lock in rates in the current interest rate environment over your planned horizon in the house.

You’re waiting to get your loan balance down to where you can get a conforming loan. That’s smart. Why pay jumbo rates when you’re within a couple of grand of a conforming rate loan? The Federal Housing Finance Agency maintains a Web page, “Conforming Loan Limit,” that lets you look up the conforming loan limit in your county. If you’re worried about where interest rates are headed between now and May, you could even do a cash-in refinancing, kick in the two grand, and lock in to today’s interest rates.

I’ll be the first to tell you that I don’t know whether mortgage rates in May will be higher or lower than they are now, but you can take the pulse of the market by reading the weekly Bankrate.com Rate Trend Index. You can even have the feature delivered to you weekly as an e-mail alert. I do. You can also follow the CMT on Bankrate using its Treasury securities page.

Take a look at the Mortgage Professor’s calculator, “Refinancing an ARM into a FRM,” to sort out some of the risks and rewards between holding on to your ARM or locking into a fixed-rate mortgage.

Don’t forget that you’re seven years in on this refinancing. If you can afford it, you want to consider a shorter term on a fixed-rate mortgage than a conventional 30-year fixed.

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