Refinance ARM to a Fixed Rate?

Dave coaches a caller on what to do about refinancing to a fixed rate from an ARM.

QUESTION: Sharon and her husband have a 5-year adjustable rate mortgage (ARM) on their house, but she wants to refinance to a fixed rate.  There’s a 2% pre-payment penalty to do this, which will amount to $2,400.  What should she do?  Also, what should she do with categories on the budget form that she doesn’t need or can’t afford right now?

ANSWER: If you refinance to the fixed rate, you’ll have to write a $2,400 check to avoid the risk that your payments could change.  This would allow you to lock into an interest rate which is at or near a 40-year low.  You should absolutely write the check or roll the $2,400 into the closing costs when you refinance.