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Dear Dr. Don,
I have a 5/1 adjustable-rate mortgage with an interest rate of 5 percent. The five-year lock ends in September 2009. It would be LIBOR plus 2.75 percent. It can go up 1 percent per six months after that but can't reach a total higher than 11 percent.
We might be in this house anywhere
from one to five years depending on the market,
but definitely not for another 10 years or more.
Based on the current rates lately and considering
that I'm in a declining housing market, should
I worry and refinance right now or ride it out
until then and see what happens?
-- SD Sterling
 Dear
SD,
When your ARM is priced off LIBOR, or London Interbank Offered Rate, it gets a bit dicey trying to handicap where the interest rate is headed. You have to contend with United Kingdom inflation and currency effects being priced into LIBOR. I like to tell people to consider LIBOR the U.K. equivalent of the U.S. federal funds rate.
There are a host of LIBOR rates, so it's important to know which LIBOR rate applies to your loan. Bankrate tracks four LIBOR rates on its
"LIBOR, other interest rate indexes" page: the one-month, the three-month, the six-month and the one-year rates.
You say you'll be in the house for one to five years and the current fixed term on the 5/1 ARM runs for another 18 months. I don't know where interest rates will be 18 months from now, but I'd lean toward taking the risk and not refinancing the loan. I lean that way because you don't know how long you expect to be in the house, but, at the outside, you expect it to be no more than five years and the remaining term on your existing mortgage covers 30 percent of that time period.
If the closing costs on refinancing your home are anywhere close to the Bankrate national average, you'll spend about $2,736 to refinance your home. If you refinance in today's market, the interest rate for a new 5/1 ARM is about 5.5 percent. That has you paying an extra half-percent for 18 months that you wouldn't be paying with the existing loan, or $750 per $100,000. On a $200,000 loan, that's $4,236 for the two expenses ($2,736 plus $1,500).
If you're thinking about refinancing with a fixed-rate mortgage, the mortgage professor, Jack Guttentag, has a neat calculator on his Web site for
just your situation, "Refinancing an ARM into a FRM."
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