Before Refinancing, Crunch Hidden Numbers

The decision to switch from an ARM to an FRM, however, depends on more than just when you plan to sell the house. It also hangs on how and when your rate will adjust. Rates for a 5/1-year ARM (a popular type of ARM) are currently 0.08 percentage point higher than rates for a 30-year FRM. But as recently as two months ago, rates on ARMs were 0.5 percentage point lower, and had been for some time. The two types of mortgage rates are influenced by different market forces.

Take a look at your ARM to determine how much your rate can jump from year to year and what your rate is based on. If the rate on your ARM is likely to remain lower than what you can get with an FRM, consider delaying refinancing, especially if you're considering selling the house in the next few years.

If you are in the fifth year of a 5/1-year ARM, your rate is about to adjust. Say you have a 0.5% cap on annual rate adjustments and your original rate was 5.5%. Even though ARMs currently sit at 6.57%, your rate will only rise to 6% for next year. Refinancing with a 30-year FRM right now would carry a rate of 6.49%, according to the latest rates from BankingMyWay.com. A 0.5% difference in rates on a $200,000 mortgage translates to $78.44 a month, or $941.28 a year, more in payments.

By waiting to refinance, you'll save $941 in extra payments and also save $3,000 in closing costs. And even if rates shoot up again next year, your 0.5% rate cap will keep you at the same monthly payment as if you had refinanced to the FRM at 6.49%, yet without any closing costs. To see how your numbers would look, check out the online ARM vs. FRM calculator from BankingMyWay.com.

It may be tempting to try and take advantage of lower interest rates, but remember that there's more involved in a refinance. Crunching the numbers before deciding whether to refinance will put you in a better position to make the right call.

>To order reprints of this article, click here: Reprints