This is a follow-up to my last column, where I took an unsympathetic view of ARM holders who ignored the Federal Reserve's warnings that it would be raising interest rates at a "measured" pace. The Fed began its series of rate hikes in mid-2004, when many adjustable rate mortgages were below four percent. It made no secret of its intentions to continue to raise rates. Many ARM holders had the opportunity to refinance to a fix rate below six percent in 2004 and 2005.

The problem was that ARMs were not yet rising and many homeowners with an adjustable rate were still paying well below five percent. These folks were not inclined to refinance to a fixed rate while their ARM rate was so low.

Today, ARM holders are facing much higher interest rates as their ARMs are reset. But this is water under the bridge. The good news is that while short term rates, which include adjustable rate mortgages, have risen considerably, long term rates have risen at a much slower pace.

Let's take a look at some common ARM indices and see where they are at today:

• The LIBOR, or London Interbank Offering Rate: ARMs tied to the LIBOR were very much in favor from 2001 through 2004. The LIBOR tends to follow U.S. short term rates and often will move more dramatically. This is why LIBOR-based ARMs were so popular. When the Fed was lowering rates, the LIBOR followed with enthusiasm, dropping further than most other ARM indices. Unfortunately, the LIBOR behaves in the same manner when it's on the rise -- moving higher than most other indices. The monthly LIBOR is currently hovering at just above five percent.

• The One Year Treasury Constant Maturity: The TCM is based on treasury bills auctioned off by the federal government. This is a more seldom used index for ARMs, but can be expected to move similarly to other short term interest rates. Its rate is currently at about five percent.

• The 12 Month Treasury Average, or MTA: This index averages the yields on treasury bills over a period of one year, making it slower moving and less volatile. It's rising slowly and is currently yielding about 4.25 percent

Most ARMs carry a margin between 2.00 and 2.75 percent. This is the amount that's added to the index to determine the actual interest rate on the mortgage.

So, depending upon your index and the amount of the margin, ARM holders are facing "fully indexed" rates somewhere in the range of 6.25 and 7.75 percent at the time of adjustment.

While thirty year fixed rate loans are about 1.50 percent higher than the rock-bottom lows of 2003, they are still considered low by historical standards. In fact, most ARM holders are facing adjusted rates that are higher than today's fixed rates.

Depending upon the situation, a homeowner should be able to find a fixed rate mortgage at 6.75 to 7.00 percent with little or no closing costs. As I mentioned in the last column, it makes no sense not to fix your ARM if the rate is at or near the fully adjusted rate on the ARM.

ARM holders should do two things:

First, check and see when your ARM is scheduled to be reset (if it hasn't already done so) and confirm your index and margin. This will give you a good idea on what your new rate will be. If the reset date is within 18 to 24 months, I wouldn't hesitate to get out of the ARM.

If the reset date isn't for another three, four, or five years, the decision to refinance becomes more difficult, especially if the start rate on your ARM is well under market rates. While most experts are predicting that both short and long term interest rates will continue to rise over the next 12 months or so, the question of how long they will remain on the upswing is much harder to answer. It's perfectly reasonable to predict that rates could start falling again in 2007 or 2008.

In the past, the Fed has over tightened credit in order to stifle inflationary pressures. While this is a good thing, it can also stifle economic activity. If the economy slows, there's a good chance rates could drop, opening the door for homeowners to refinance into lower rates.

This brings me to my second piece of advice. If you feel you are a candidate to refinance to a fixed rate, don't get fooled into taking a low note rate that carries thousands in fees and points. A zero cost refinance carries a higher rate -- perhaps 6.75 to 7.25 percent, but keeps the door open over the next few years to refinance again, if and when interest rates begin to drop. You don't want to pay thousands of dollars in points "buying down" an interest rate that could be free in a year or two.

Published: May 22, 2006

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.