By switching to a fixed rate loan, you will not only
reduce your payment, you will also likely lock in an
attractive rate for as long as you own your home.
In fact, while one year ARMs currently offer tempting
introductory rates averaging 5.59%, most experts recommend
avoiding them, because you could easily find yourself
facing sharply higher payments in the near future, even
if interest rates don't rise. Why? Well, after the introductory
rate expires, ARMs are typically pegged to the one year
Treasury rate (recently 5.25%) plus 2.75 percentage
points, with increases of as much as two points a year.
Assuming interest rates don't change, you would pay
7.59% in the second year (the full two point increase)
and 8% in the third year.
There are certain cases, however, where an ARM makes
sense. If you are fairly certain you'll be moving within
five years, you can save some money -- and avoid rising
payments -- with a five year ARM, recently averaging
6.62%. Such loans offer a fixed rate for five years
and adjust annually thereafter.