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Should I refinance to an ARM?

November 15, 2012: 6:30 AM ET

I have a 30-year fixed mortgage with an interest rate of 4.275% and a balance of $144,000. I need to increase my monthly income. Should I consider refinancing to an adjustable rate mortgage? –Butch E.

If you're planning to sell your house within a few years, refinancing to an adjustable rate mortgage (ARM) can offer a clever way to lower your monthly payments, says Matthew Delamater, a mortgage loan officer at Northeast Bank in Portland, Maine. But he warns that if you stay in your home beyond the ARM's fixed period, you may see a dramatic jump in your mortgage payment.

Here's why: ARMs typically offer lower monthly payments than fixed-rate mortgages because they start off with lower interest rates. The average rate for a 5/1 ARM recently was just 2.98%, while the average 30-year mortgage had a rate of 3.47%, according to Bankrate.

But the ARM's rate will change over time: A 5/1 ARM's rate is fixed for five years, then adjusts annually based on current interest rates. With interest rates at historic lows, most experts agree they can only go up. And if and when that happens, you might get stuck with a monthly payment you can't afford.

— Marc Mewshaw

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