If there is NO pre-payment penalty from your mortgage company, you might get estimates from your bank or a credit union for other payment information. Don't get too many estimates as this will count against you. Just talking to other people won't count but getting a credit report each time will.

Your current I/O ARM is 6.875% and your bank is offering a 30 year fixed at a full percentage point lower? That would get my attention, too.

I think an important question is when does the interest only period kick over into full amortization? Year 5? Year 10? If you stay in the house, will you refinance into another I/O ARM or go ahead with an amortizing payment that could be significantly higher if interest rates go up?

Right now, your payment is $595. The FRM would take it $632. LetÂs assume you stay with your current loan and, in four years, your interest rate stays the same at 6.875%. If you begin amortizing in Year 5, your payment will be $727.

It's anybody's guess where interest rates will be in four years. But what you know for sure is that by refinancing into a 30 year FRM at 5.875, you lock in that $632 payment and your loan balance in four years will be reduced from $107K to $101K. If you stay with the interest only feature, your loan balance in four years will remain at $104K and you might face a much higher payment. That extra $50 now buys you some extra flexibility, in the form of equity, should you sell in four years.

Refinancing now sounds like a good deal but, that depends on how painful putting an extra $50/month might be to you at this stage. Hope this helps.

Here is a link that might be useful: Interest Only Calculator

Thanks, that helped to put things into perspective.

The interest-only period is for ten years.

It just is a lot of trouble for me to refinance since I am self-employed, but I thought that since this is the same bank I currently have my mortgage with, they might give me less of a hassle.

Something in your info sounds wrong. A 30-year 6.875% 107K loan shuld have a monthly payment of about $703. You need to check with the bank to be sure you've understood their offer correctly.

We can use the figures you gave. Since your curent loan is interest only, you are not reducing the principal. If you were to pay an extra $50/month (a payment of $645) toward the princippal, in four years, you'd reduce your 104K mortgage balance by $2712, leaving you a mortgage balance of $101,288.

If, instead, you refinance at the higher rate and just pay the $632 payment, your mortgage balance after four years would be about $102,050. While the balance slightly higher, I'd definetly trade that for the stable payment of the fixed rate loan.

But like I said, the figures you gave for the refinance monthly payment don't make sense. There must be something more involved.

feedingfrenzy, I think that you misread the OP. The new 30 fixed rate loan is 5.875%.

Yep, I got mixed up. Thanks for pointing it out!

OK, making the $632 payment on the 107K refinance loan at 5.875% for four years would leave you with a mortgage balance of $101,113.08

Paying $50 extra on the 104K interest only mortgage at 5.875% for four years would leave a balance of $101,257.76. So you're better off refinancing. Not only will your monthly payment be lower than if you paid an extra $50 on the present mortgage each month, but you'll also reduce the principal faster AND have the security of a stable payment.