To re-fi or not to re-fi?

I live in an area not particularly hard hit by the housing crisis. I got a very good price on my home and it is worth more than I paid for it. I got a mortgage from my local small town bank. All that sounds good, right? The problem is that my small town bank had no fixed-rate mortgage product and so I got a 20-year A.R.M., which resets annually at 2% over prime. Each of the first two years after I bought the house my mortgage payment increased $100 a month. This past year it went down $100 a month, leaving me paying about $100 a month more than the first year in which I owned the house. My mortgage payment has remained manageable for me throughout all of these adjustments. Nonetheless, the economy being what it is, I’m a little nervous about what the future holds for me and my A.R.M. and have been trying to decide where to go from here.

I had a bizarre little problem with my bank recently, which I couldn’t seem to resolve so I wrote a letter to one of the vice-presidents, whom I’ve known slightly for a long time. She called me to apologize and to say that the problem had been cleared up. While we were chatting I asked her about my A.R.M. and whether or not the bank had come up with any fixed-rate products since I bought the house. She replied that they hadn’t but that they did have an A.R.M. that had a 5-year initial fixed-rate period, at which time it would adjust and then adjust annually. She said if I was interested I should write her a letter outlining my concerns with my current mortgage and they could probably roll me into that loan. I feel like if I’m going to do that, it would benefit me to do it soon while they are still feeling apologetic regarding my recently resolved issue.

I’m not sure what I want to do. I really like dealing with my local bank and really don’t want to go elsewhere. In addition to personally knowing some of the bank’s officers, my mortgage loan doesn’t have any of my taxes or insurance bundled in, which I like. At the same time, I’m afraid that if my rate is fixed for five years, the eventual adjustment will be a lot harder to take than the more gradual annual adjustments. I’d hate my payment to go up $500 a month or more in one stroke. Alternatively, five years of stable payments would be helpful. My mortgage adjusts at the end of May, by which time my son will have graduated from college. I expect (hope) my expenses will drop dramatically at that time. If I knew I wasn’t going to be here in five years I’d jump on this other product immediately. Actually, even if I do end up moving to upstate New York (a real possibility) I suspect I would keep my house here in Texas and probably rent it out as I believe it is a good investment.

Alternatively, I could throw all my local loyalties to the wind and refinance my mortgage with some other entity altogether and get a traditional fixed-rate mortgage. I think I’m leaning towards taking the five year fixed-rate, which turns into an A.R.M. with the thought that I can switch to something else when I see which way the wind is blowing near to the end of that term. I would also try to pay on my mortgage very aggressively during that five-year hiatus.

What would you recommend? Do you have an A.R.M.? How are you dealing with it?