mortgage

Should you refinance a 2.8 percent ARM?

Don TaylorDear Dr. Don,
I am wondering whether I should refinance my investment property. I have an adjustable-rate mortgage loan and the rate reset at 2.8 percent in September 2014.

While the rate changes every year, most people say that rates are headed higher. Does that mean I should try to lock in a fixed-rate before the year ends? I need your advice!

I currently owe $214,000.

Thank you,
-- Alex Adjusts

Dear Alex,
This is a classic dilemma. I'm sure you are happy with your low rate on the ARM, but you don't want rates to head higher. The risk is that the rate on the ARM goes above the fixed rate you could have locked in by then.

House on money © Andy Dean Photography/Shutterstock.com

The key is how long you plan to own the property. The longer you plan to own it, the more willing you should be to pay the closing costs on a refinancing as well as the higher interest expense over the next few years to lock in that fixed rate.

You now have a great rate on your mortgage. You didn't mention what interest rate is used as the benchmark when the rate is reset. That shouldn't make too much of a difference in deciding whether to refinance. It's always a good idea to review your loan documents to determine the annual and lifetime caps on the rate increases, along with the rate reset formula.

For the short-term rate to head higher, the Federal Reserve Board would have to start raising the federal funds rate, which would put pressure on other rates. While they might begin to do that in 2015, they're expected to raise rates slowly over time. That's based on what we know right now. It can always change.

It should be at least a couple of years before the rate on your ARM exceeds Bankrate's current national average for a 30-year fixed-rate mortgage of just over 4 percent. In a few years, it is possible that a fixed-rate mortgage could be in the 6 percent to 7 percent range.

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