With another interest rate slide, I'm exploring options to refinance my mortgage these days. My current mortgage is a 7-year balloon loan with an interest rate of 4.25%. The best offer I received today is a quote from a local broker for 5/1 ARM at 3.875% with no fee, no closing cost and no prepayment penalty. (I still need to find out some more details as of the "caps" and whether it is a true no closing cost refinancing.)

I cannot decide whether to refinance now or wait for a slightly better rate (if ever) and here is why:

Granted, with an outstanding loan balance of $249,000, a 0.375% rate difference equals more than $900 interest savings every year. However, my current 7-year balloon loan offers 1.5 year more of stable monthly payment protection (6 months already passed since I borrowed the money).

On the other hand, my wife and I generally agree we will live in this house for at least 5 years but no more than 7 years. If we live till the end of the 7-year term (which is 6.5 years from now), I will be better off not to refinance now. It only takes 1.25% rate hike after the 5-year period to more than make up the 0.375% interest rate benefits I would enjoy (1.25% = 0.375% * 5 / 1.5). With the current economic climate, it is almost a sure thing.

The puzzle, however, is that no one can tell for sure how long we will live in this property.

In conclusion, I am not determined to refinance right now, but if I can get a rate at 3.50% or so, I will be much more willing to do the refinancing. I will keep watching BankRate. Hopefully, I can see another low of the interest rates pretty soon.