Homeowner should resist ARM refi

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Dear Dr. Don,
We have $153,000 balance on our home mortgage. It’s a 30-year fixed-rate mortgage with an interest rate of 6.75 percent. We have been contacted by our bank to refinance into a new 30-year fixed-rate loan at 5.25 percent. The $150 a month we would save would ease a financial burden right now.

However, we are thinking of possibly selling this house in the next few years. Would it make sense to refinance to a new 30-year fixed at 5.25 percent or even a 5/1 adjustable-rate mortgage, considering we may sell? It seems the closing costs will be recouped in about 19 months, assuming the $150 a month savings.
— Rob Reflects

Dear Rob,
I think a refinance is in the cards, given today’s mortgage rates. As I write this, Bankrate’s national average for a 30-year fixed-rate mortgage is at 5.07 percent. So, your lender is spot on with the offer to refinance at 5.25 percent. Bankrate’s national average for a 5/1 ARM is 4.27 percent at the time of this writing.

You can use Bankrate’s refinancing calculators to compare the two, but to my mind the key phrase in your letter is “considering we may sell.” If you’re uncertain about selling, I’d suggest going with the fixed rate.

No one knows where mortgage rates will be five years from now, but odds are they’ll be higher. Look at the difference between the fixed rate and the ARM as an insurance policy that gives you a measure of flexibility when it comes to the timing of when you want to sell your home. You’re saving 1.5 percent by refinancing into a new fixed rate, don’t let the siren song of an ARM paint you into a corner when it comes to selling your home.

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