Question: I am a single woman with a good job and a nice salary. My current mortgage rate is at 4.50 percent on a 3/1 ARM. I took the loan out about a year ago so I have two years left before the rate adjusts. I'm hoping to retire in about 15 years when I turn 65. Since rates have headed up, I'm thinking about refinancing to a 15-year fixed rate so I will have no mortgage when I retire. My mortgage balance is only $130,000 and the property is worth at least $400,000. A friend at work advised against the refinance because I have no savings. He's right that I have very little in my checking account, but I have over $100,000 in my retirement plan because I max out the contribution every year. Can you give me any advice?

Answer: There are a couple of separate issues here. The first is whether or not to refinance a low-rate ARM to a higher fixed rate. The second is whether or not your method of putting money for savings into illiquid investments is wise.

The first issue is easy to tackle because the analysis is simple. Refinancing to either a 15 or 30-year fixed rate will result in a higher rate than 4.50 percent. Currently, you should expect to pay about 5.25 percent for a 15-year loan and about 5.75 percent for a 30-year loan (both without any points). If you think interest rates will be higher two years from now, it might make sense to fix your rate now. On the other hand, interest rates are hard to predict. If they stay stable or drop in the next 24 months, it would be wise to wait until your ARM is ready to adjust so you can reap the benefit of the lower 4.75 percent rate.

It all depends on where your comfort level is. A good loan officer can go over different scenarios. The Federal Reserve has made clear its intent to continue to raise short-term rates in 2005. This will certainly affect adjustable-rate mortgages, but it may not have a significant affect on fixed-rate, long-term loans. My initial thought would be to go ahead and refi to a fixed rate if you're worrying about the future. Peace of mind is a good thing.

But I would certainly question the wisdom of taking out a 15-year fixed rate if you have no liquid savings. Every household should have a balanced financial picture. An investment portfolio should have a proper mix of growth stocks, income stocks, bonds, etc. This mix should be tailored to each person's individual situation.

It seems to me that your financial picture is a bit out of balance. Don't misinterpret what I'm saying -- maxing out a tax-deferred retirement account is one of the best things anyone can do -- but you should have a bit more liquidity in the mix.

You have $100,000 in your IRA account. If you continue to maximize your contributions for the next 15 years, the account is going to be worth a lot more.

Now let's look at your real estate. You currently have $270,000 in equity and the chances are overwhelming that in 15 years, your house will also be worth much more.

This is not a wealth problem or a savings problem -- it's a liquidity problem. You need to start building up a savings account that can be tapped in case of an emergency. Your friend has a good point. All of your wealth is difficult to turn into cash. If for any reason you need some money, you would either have to pull it from your retirement account with a possibility of a financial penalty, or you would have to either borrower against the account or take out a second mortgage. Either way, the money is there but not readily available.

Refinancing to a higher rate 15-year loan will cause your payment to skyrocket -- perhaps twice your current payment. Here's the question that I have for you: Would you be able to continue to make your retirement fund contribution and start a liquid savings account with an increased mortgage payment?

My advice is this: If you can afford to start a liquid savings account and absorb the increased payment of a 15-year mortgage, go for it. But if you can't, refinance to a 30-year loan, take the payment difference and invest it in a reliable and liquid mutual fund.