While I do agree with the other posters that you have an excellent fixed rate, I think your option can be broken down a little bit to make the decision clearer based on your anticipated stay in the home. If you stay in your current loan for the next 10 years, at 4.375%, the total percentage of interest paid over that time would be 43.75% (or 10 x 4.375% = 43.75%) for an average yearly interest of 4.375% (obviiously).
Assuming this ARM option has a 2% max cap per year (which you indicated) and a lifetime cap of 5% (which you did not mention, but I would assume) if you refinance into a 5/1 ARM at 2.75% for the first 5 years, and then it increases at year 6 by the 2% cap to 4.75% and another incresae of 2% in year 7 to 6.75% and again in year 8 by 1% (as the cap of 5% would now be reached) to 7.75% and stays there for year 9 & 10 as well, your numbers would look like this:
Year 1 - 5 2.75% x 5 = 13.75
Year 6 4.75% x 1 = 4.75
Year 7 6.75% x 1 = 6.75
Year 8 - 10 7.75% x 3 = 23.25
Total interest paid over the 10 years would be 48.50%, for a yearly avergage of 4.85% .
Therefore in this case, if you were to stay the home for ten years, it would make more sense to keep your current fixed rate. However, if you stay in the home for only 8 years, the average yearly interest would be on 4.125%, making it slightly adventatgeous to refinance into the ARM.
While there are certainly other considerations when deciding to use an ARM, I hope these numbers give you a little more information in order for you to make an informed decsion.
I have a conservative view on this subject. I am a firm believer that if you can comfortably afford the fixed payment, then stick with that.
One reason is, that if you have an adjustable rate and the market tanks (causing the rates to go up), something could happen that might jeopardize your ability to refinance when you really need to (such as losing a job), and you will be stuck. Besides, by the time adjustable rates have gone up... the fixed rates have gone up as well.
The second reason, is that as time goes on, more of your payment is being applied to principal reduction and less torwads interest. Refinancing only starts the process over again.
I believe one should play it safe when it comes to the roof over their head. If you want to gamble, do it with an investment property.
Finally, I would seek the advice of another lender to clarify all caps and index info should you decide to go with an adjustable loan. You need to be crystal clear on this.
The OP needs to verify the rate and terms because they don't exist. There is no 2/2/2 caps and no 2.75% 5/1 that yields enough to do a no cost high balance refi.
I walked through this exact scenario with a client and when he got the TIL and GFE from the lender touting the "2% cap" there was in fact a 5% 1st payment adjustment. The LO pitching this loan either didn't know what he was talking about or was intentionally misleading the client - either answer is bad.
Blue888 - are you sure that's a 2% cap at the end of the 5th year?
Generally, companies that solicit borrowers in already established, low rate, 30 year fixed mortgages are not looking out for your best interests and may tend to be misleading with the numbers.