Keep Your ARM Or Trade It For A Fixed-Rate Mortgage?

If your current home loan is an ARM and it's entered its adjustment phase, celebrate. As U.S. mortgage rates and closing costs have climbed nationwide, rates on adjusting adjustable-rate mortgages have dropped with no costs to pay whatsoever.

However, if you expect mortgage rates to rise over the long-term, this could be a good time to lock a great 30-year fixed rate mortgage, too.

You have three options on your ARM :

Do nothing. Let your loan adjust higher and revisit the rates again next year
Refinance your ARM to a new ARM using today's low ARM mortgage rates
Refinance your ARM to a new fixed rate loan at today's fixed rate pricing
Each option has merits.

For example, if you allow your ARM to adjust, you'll get a new mortgage rate based on today's LIBOR, and that should leave you south of 3 percent. This is a terrific mortgage rate as compared to the current mortgage market, and you'll get to keep the rate for the next 12 months, at least.

You can also opt for a new ARM altogether. This can lock your rate in place for the next 5 or 7 years or longer, depending on your needs. You'll avoid the annual adjustments of a recasting ARM and can benefit from lower mortgage rates as compared to a new fixed-rate loan.

Lastly, there are reasons to switch from an ARM to a fixed loan, too, the most common of which is to prevent any sort of future rate change. Homeowners with ARMs overwhelmingly refinance into fixed rate loans, according to Freddie Mac's Refinance Transition Report.