I stated in my article, "Refinance Rumors", that an ARM could make sense if you plan on staying in your house for a short term and then selling. However, many people aren't like Roxanne (see "Refinance Rumors"), in that they don't know exactly when they are going to sell. I mentioned the scenario analysis explained by the mortgage professor in "Choosing Between Fixed & Adjustable Rate Mortgages". The scenario analysis allows one to calculate the best and worst case scenarios of an ARM and compare them to the results of a Fixed Rate Mortgage. Regardless of what the scenario analysis tells you, there is still risk involved in choosing an ARM.
Here are the reasons to refinance to a fixed rate mortgage over an adjustable rate mortgage:
Budget Security
You can feel secure that your interest rate won't increase later to a rate that you can't afford. This certainty will allow you to comfortably take care of other expenses and meet each payment on time. Many times people are willing to pay slightly higher lender fees in order to have this security.
Lower Interest Rates from Original Loan
If current rates are low and you still have many years left on your mortgage, refinancing to a fixed rate mortgage is probably the way to go. The low rates might cause one to feel that they won't be getting any lower so there is no reason to take the risk on an ARM. By refinancing to these lower rates, you can decrease your payments each month and free up cash for other needs. Also, even though these rates might be slightly higher than the initial rates of an ARM, your pay increases throughout the term of the loan are likely to make each payment less of a burden.
The mortgage professor states in "ARMs or FRMs?" that "you must balance the rate savings on the ARM relative to an FRM during the initial rate period of the ARM, with the risk of rate increases when the initial rate period ends - if it turns out that you still have the mortgage at that point. The rate saving is the FRM rate less the ARM rate at about the same number of points."
I agree that the scenario analysis is a great tool. However, I want to add that you should consider the consequences of a worst-case scenario before going with an ARM.
