As the economy strengthens, super-low ARM rates will adjust upward. Meanwhile, rates on fixed-rate mortgages are expected by many in the industry to start rising this year, after the Federal Reserve halts its purchase of mortgage-backed securities.
When the Fed exits mortgage market

The central bank is helping to keep rates low and fund loans for home buyers and refinancers, but in March it plans to end its support. Greg McBride at Bankrate.com says buyers still have some time, but if you’re eager to refinance, get going. MarketWatch’s Andrea Coombes reports.

Many ARM holders are faced with two options: Give up their low rate now and refinance into a fixed-rate mortgage with a higher rate — but one that’s still near all-time lows, or hold on to that cheaper ARM rate as long as possible.

If your rate is indexed to the Libor, it could be at about 3% right now, said Keith Gumbinger, vice president for HSH Associates, publisher of consumer loan information. The 30-year fixed-rate mortgage averaged 4.93% for the week ending Feb. 18, assuming payment of an average 0.7 point to obtain it, according to the latest Freddie Mac survey of conforming mortgage rates. See Mortgages.

“Some borrowers may opt to roll the dice again,” Gumbinger said, and decide to stay in their current ARM to enjoy the lower rates as long as they can.

Trying to time the market, though, can be risky.

“The market can change very fast,” said Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania, and operator of “The Mortgage Professor” Web site, at mtgprofessor.com.

Depending on market conditions, it’s not impossible for an ARM’s rate to jump at least a couple of percentage points when it resets, he said.

“If you’re an ARM borrower, you can’t just look at your ARM rate and wait for that to change,” he added. If you do, you could be headed for some payment shock — and possibly miss out on securing a low fixed-rate mortgage that will remain low throughout the entire life of the loan.
Pick your moment

ARMs typically reset after an introductory fixed-rate period, then reset regularly, often on an annual basis. For example, a typical 5/1 ARM will adjust for the first time five years into the loan, then will reset every year afterwards. There are often caps on how high the rate can adjust.

If the difference between someone’s current ARM rate and the fixed-rate they’d be able to obtain isn’t too large — say, 1% or less — there likely isn’t a significant difference in monthly payment and it might be wise to refinance now, even if it means forfeiting your current low rate, Guttentag said. That way, you can secure a low fixed rate now and not gamble on when rates will move higher.

But for those with an ARM rate of 3% or less, it’s a tougher decision.

Those who don’t err on the side of caution and choose not to refinance now should vow to be astutely aware of the market so they can refinance before rates go up substantially, Guttentag said. They need to pay special attention to the index to which their ARM is tied — the 1-year Treasury or the Libor, for example.