I'm a first time homebuyer and currently have a 30-year fixed first
mortgage for 5.6% and a 15-year fixed second for 7.5% with a balloon
payment on the second due at end.

The guy who worked this deal is now with a different company and
called me up to see how I liked the house. He then offered to set me
up with a interest-only 7/1 ARM that he said would bring my monthly
payments down by about $400 bucks. The new loan amount would be for
80% of the appraised value so I still wouldn't have to worry about PMI
but the 80% would cover the amount owed on the first two loans. He
also said that what I would need to do (his opinion) is refinance
before the seven years to avoid the potential for a higher interest
rate.

Factors:

1. House has appreciated about 75-100K.

2. When I look at the amount still owed on the house, I might as well
be in an interest only loan.

3. I plan on staying in this house until at least 2010.

4. I have no other significant debt.

Questions.

1. Is this absolutely not a good idea?

2. Is it not a good idea to refinance after only one year?

3. If not this ARM, would I still benefit from a refinance to combine
both my loans into one at about 6.5% 30-year fixed?

I realize that I probably haven't provided near enough information,
however, I'm just looking for some "what would I do" comments from
those that have been down these roads before!

TIA!