I began writing about the attractiveness of adjustable rate mortgages tied to the LIBOR index in January of 2002. To recap, LIBOR stands for London Interbank Offering Rate, which is basically the rate that European banks charge each other for overnight funds. Specifically, I touted the monthly LIBOR ARM, which has the ability to move every month.

It was pretty easy to see why I was so keen on the program. A fully indexed LIBOR ARM was hovering at about four percent back then, and that was without out having to pay any points. Thirty year fixed rate mortgages were hovering between seven and 7.25 percent with no points. Clearly, the big spread between long term and short term interest rates warranted some attention.

There was another reason why I liked LIBOR loans: The Fed had made it clear that it was prepared to lower short term rates in order to offset the ill economic side effects of the 9/11 terrorist attacks. The LIBOR index has a history of following the movements of US short term interest rates, which are controlled by the Fed. I'm not one to stick my neck out and predict interest rates, but this prediction wasn't very difficult.

So what happened? Well, it turned out I was right. The rates on LIBOR-based mortgages sunk. By the end on 2002, the folks who took out a LIBOR at four percent were paying 3.50 percent. By mid-2003 they were paying 3.25 percent. And by January of 2004 they were paying a rock-bottom three percent for their mortgage money.

Half way through 2004, the LIBOR folks started to pay perhaps 3.25 percent. Meanwhile, long term rates, which reached 30 year lows in mid 2003, had risen by almost one percent.

By the end of 2004, the LIBOR folks were paying somewhere between 4.25 and 4.50 percent -- a big spike upwards but still not bad when looking at the big picture.

Then something funny happened. Long term rates peaked in 2004 but have declined considerably since then. Meanwhile, Fed Chairman Alan Greenspan continued his credit tightening campaign by continuing to raise short term rates, resulting in a higher LIBOR.

Let's fast forward to the present day. Current LIBOR-based mortgage holders are facing rates in the 5.75 to 6.25 percent range. Depending upon the type of ARM, these rates can adjust monthly, every six months, or annually.

For those folks, my advice would be to take out an insurance policy, because it won't cost much. What I mean by that is to fix that ARM -- eliminate interest rate risk for a while. Let's look at some numbers.

I see that as of this writing we can refinance a $400,000 loan, for example, to a 5/1 ARM with little or no closing costs to a rate of about 5.625 percent. So a homeowner with a monthly LIBOR ARM paying a current rate of perhaps 5.75 percent can lower his rate by 1/8 percent and fix it for the next five years -- all with little or no cost. This is a terrific deal for folks who think that they might move within five years or simply believe that the interest rate environment will improve at some point, creating another refi opportunity.

If five years isn't long enough, I see that the 10/1 ARM rate is still under six percent, at 5.875 percent, and that's again with little or know closing costs. A thirty year fixed rate? Figure on about 6.125 percent.

This is what a flat yield curve will do. Short term rates are no longer a bargain because they're not much different from long term rates.

For those who are holding short term LIBOR-based ARMs, I say two things: First, congratulations, because I made some quick calculations: If you took out the loan in early 2002, you have enjoyed paying an average mortgage rate of only 3.83 percent, assuming your margin over the LIBOR index is two percent. Not a bad rate over three and a half years. Second, change is inevitable, and the once bargain LIBOR ain't no more. Get out now while long term rates are still favorable. Fix your mortgage money for five, seven, ten or thirty years -- whatever best suits your individual objectives.