Should I refinance to a 7/1 ARM?

I currently have a traditional 30 year fixed mortgage at 4.125% with monthly payments of $615.00 not including taxes and insurance, and going on the third year of the mortgage. My house is worth $200,000, and I owe $123,000. Three years ago I took out a $30,000 mortgage with the city I live in to rehab. my house. I do not have to pay back this loan until the house is sold, nor do I have to make any payments. For the $30,000 loan a 3% interest rate, but can never surpass half of the loan, so the most I could owe on the loan is $45,000. All together I currently owe about $155,000. Would it be wise to refinance to a lower 7/1 ARM and combine the two loans so I do not have interest accruing on the second loan from the city, or just leave my loan how it is now. I don't plan on living here the rest of my life, but I did buy this house at the high point of the market at $390,000, with a down payment of $260,000, something I really regret now. I really don't want to lose all the money I put down on my house if I were to sell it in a few years. What would be the best option? by davido_346_760 from Long Beach, California. Sep 17th 2012 Reply