When is a good time to search for a fixed rate instead of keeping the ARM?

We have a 5/1 ARM that we got last summer at 5.875%. The recent fed cuts have caused some fixed rate loans to drop below our current rate. However, we would have to pay about $1500 in closing costs to switch. We have 3.5 years left with our current ARM loan rate. When would be a good time to start considering refinancing to a fixed rate and what should we take into consideration when doing so?

When is a good time to search for a fixed rate instead of keeping the ARM?

If you can save $1,500 a year in interest, you should switch now. Fixed rates are now about 6%. For 6% interest to amount to $1,500 per year, your mortgage only needs to be greater than: $1,500/6% = $25,000.

So, if your mortgage is more than $25,000, switch now. Why? Because interest rates are still very low, compared to previous periods, and are much more likely to go up than down. So now is the time to lock in a good fixed rate.

When is a good time to search for a fixed rate instead of keeping the ARM?

The key is whether the savings in locking into the lower rate offset the closing costs on the refi.

If you definitely plan on selling before the ARM resets, it's probably not worth the cost of refinancing just to lock into a fixed rate. If you think you might be around past the ARM reset and you end up recouping the refi cost, you might want to reconsider.