Should ARM Borrowers Refinance or Stand Pat?

(May 31, 2006) -- Home owners who took out adjustable-rate mortgages are facing big payment increases. But refinancing may not be the best solution, experts say.

ARMs made up 42 percent of all new home mortgages in 2005, up from 14 percent in 2003, according to LoanPerformance, a San Francisco-based research outfit.

As one example of how payments have increased, the starting rate on a 3/1 ARM — a loan with a fixed rate for three years — has risen to 6.17 percent from 3.80 percent in 2003. That translates into a $220-per-month increase.

But before they refinance to lower their payments, ARM borrowers should consider standing pat. If the annual adjustment is capped at 2 percent, the rate will rise to 5.8 percent in the first year — that's less than a 30-year fixed rate right now.

Plus, refinancing costs are high, says Keith Gumbinger, vice president of HSH Associates, which tracks the mortgage industry.And by the time another year rolls around, rates could go back down.

Gumbinger is among those who believe the Fed’s next move will be to push rates back down to jumpstart a slowing economy.

Source: SmartMoney, Reshma Kapadia (06/01/2006)