Is It The Sensible Move? Refinancing From An ARM To A Fixed Rate Mortgage.

• Tweet

During the last leg of this year's Refi Boom, homeowners overwhelming chose fixed rate mortgages over adjustable ones. But was it logical?

Homeowners Abandon ARMs, Flock To Fixeds

According to a Freddie Mac report of its own mortgage holdings, refinancing homeowners flocked to fixed rate products last quarter.

Between June-September 2010, Refi Boom participants "went fixed" 19 times out of 20.

That's an astounding percentage. For several reasons, really.

The first is that the interest rate spread between the 5-year ARM and the 30-year fixed was historically large last quarter, registering 0.81% on average. By comparison, during the 12 months prior, the spread was just 0.66%.

Relative to recent history, therefore, homeowners had a large incentive to take the ARM last quarter, but chose not to.

The second reason is tied to how adjustable rate mortgages work. Because most conforming ARMs adjust on the 1-year LIBOR and LIBOR was near its all-time low last quarter, ARM-holding homeowners watched their respective mortgages adjust to 2-something percent, but still wanted out.

Instead, they got fixed rate loans in the 4s.

And lastly, it's not like the rationale for choosing an ARM over a fixed has changed that much. If a homeowner took an ARM however-many years ago, the rationale for taking one today would likely be the same (i.e. moving in the next few years; want the lowest possible payment). 85% of homeowners with ARMs swapped out for a fixed.

Homeowners opted for certainty over savings.

Fear beat frugality.

Which Is Better : ARM or Fixed Rate Mortgage?

I get asked all the time : "Is an adjustable rate mortgage better than a fixed? What should I do?" And my answer is a variation on "I don't know. Let's talk about some."

You can't know your best mortgage choice until you've asked good questions and received thoughtful answers. If you want, we can started on it right now.

. Send me some bullet points on your situation. Then, together, we'll look at your loan and your options.