ARM-holding homeowners often assume that when their mortgage is about to adjust, it's time to refinance it -- no matter what.

The math,  however,  says otherwise.

If your adjustable rate mortgage is due to reset in 2009 and 2010, the smart play may be to let it change.  After all, adjustable-rate mortgages have been adjusting downward for pretty much all of 2009 and there are no closing costs on a ARM adjustment like there would be for a brand-new fixed rate mortgage.

Here's how most conforming ARMs work:

1. For some fixed period of time, the homeowner's mortgage rate is constant
2. When the fixed time period ends, the mortgage rate adjusts to a new rate based on some pre-determined formula
3. On each subsequent adjustment anniversary, the mortgage rate re-adjusts on the same,  pre-determined formula

The pre-determined formula by which ARMs adjust is something similar to:

And just what is the "variable" and the "constant"? It depends on your mortgage.

The variable and constant can be just about anything, really -- favorable-to-the-bank numbers or favorable-to-the homeowner numbers.  This is a frightening reality for people that aren't aware of how their own ARM works either because it was never explained to them, it was never explained to them clearly, or because they forgot the explanation altogether.

However, if you have a home loan that's set to adjust in 2009 or 2010, the chances are extremely high that your ARM is structured in what is now the "standard" for conforming ARMs.  This is because practically every 3-year ARM, 5-year ARM and 7-year ARM made from 2003 to 2009 carries the same variable-constant formula.

• The variable is usually the 1-year LIBOR -- currently near 1.5 percent
• The constant is usually 2.250 percent

All homeowners with expiring conforming ARMs are facing at the same basic math for their respective adjustments. The math is in the chart above.  Most ARMs are adjusting down near 4.000 percent.

Some are even below 4 percent.

But,  just because your mortgage rate might adjust lower in 2009 or 2010 doesn't mean you should automatically let it.  Even with a falling-rate adjustment, there are certain situations in which you may want to convert an existing ARM into a fixed-rate mortgage:

1. If you intend to eventually pay off your home loan in full
2. If your ARM changes from "interest only" to "principal + interest" upon adjustment
3. If you lose sleep over keeping an uncertain household budget

And, because conforming ARMs adjust annually, the same "Should I Refinance My ARM" question will come up again next year.  If LIBOR returns to its historical average near 5 percent, the pending adjustment most certainly won't be lower.

Letting your mortgage adjust to the market may be a smart decision for this year, but foolish for the years ahead.

Therefore, in the end, allowing your ARM to adjust lower makes sense for the same reasons why a person would take ARM in the first place -- the risk of adjustment was worth it versus lower monthly payments along the way.

If your ARM is due for adjustment and you want to know whether it's better to refinance or let the adjustment occur, and we can talk about making a plan.

LIBOR can change suddenly and overnight so what makes sense today might not make sense when your loan is due to adjust 4 months from now. Having a plan with contingencies in a place is the best way to manage an ARM's adjustment.