An adjustable-rate mortgage (ARM) can be attractive because the interest rate is typically fixed for an initial period. After that period ends, however, the rate can adjust based on the loan's index, margin, and rate caps.
If you would rather have a predictable interest rate, refinancing your ARM into a fixed-rate mortgage may be worth considering. The decision should be based on your current ARM terms, available fixed rates, refinancing costs, and how long you expect to keep the new loan.
What Happens When You Refinance an ARM to a Fixed Rate?
Refinancing replaces your existing mortgage with a new loan. When you refinance from an ARM to a fixed-rate mortgage, the new loan pays off the ARM and gives you an interest rate that remains fixed for the new loan term.
With an ARM, the rate after the introductory period is generally determined using an index plus a lender-established margin, subject to the loan's adjustment caps. A fixed-rate mortgage removes that future rate-adjustment risk.
Your principal and interest payment becomes more predictable, although your total monthly housing payment can still change if property taxes, homeowners insurance, flood insurance, or other housing expenses change.
Why Refinance an Adjustable-Rate Mortgage?
Homeowners consider refinancing ARMs for different reasons. You may be approaching the end of your initial fixed-rate period, planning to remain in the home for many years, or simply prefer predictable principal and interest payments.
Refinancing may also be attractive if the fixed-rate mortgage available to you compares favorably with the potential future cost of your ARM.
However, an ARM adjustment does not automatically mean your rate will increase. Depending on the index, margin, caps, and market conditions, an adjustable rate may rise or fall. Review your actual loan documents before assuming what your next rate will be.
When Should You Consider Refinancing Your ARM?
You do not have to wait until your ARM adjusts to investigate refinancing. Reviewing your options before the initial fixed period expires gives you time to understand your current loan and compare alternatives.
Start by checking:
- When your first or next adjustment occurs
- The index used by your ARM
- Your loan's margin
- The initial, subsequent, and lifetime rate caps
- Your current mortgage balance
- Any prepayment penalty that may apply
- How long you expect to own the home
The Consumer Financial Protection Bureau cautions homeowners against assuming they will always be able to refinance before an ARM adjusts. Qualification can be affected by changes in income, credit, debts, property value, and lending requirements.
How Do You Qualify for an ARM Refinance?
Qualification depends on the new mortgage program rather than a universal set of ARM refinance requirements. The lender may evaluate your credit history, income, employment, debts, assets, property value, equity, and other underwriting factors.
There is no rule that every conventional refinance requires a 620 credit score, 20 percent equity, or a debt-to-income ratio below a specific percentage. Requirements vary by loan program, underwriting method, lender, and transaction.
An appraisal may be required, although certain eligible refinance transactions can qualify for an appraisal waiver or alternative valuation process.
What Does It Cost to Refinance an ARM?
A refinance can involve many of the same types of expenses as obtaining your original mortgage, including lender charges, appraisal or valuation costs when applicable, title-related charges, recording fees, prepaid expenses, and other closing costs.
Rather than assuming your costs will equal a specific percentage of the loan amount, review the Loan Estimate for the mortgage you are considering.
Some refinance structures allow certain costs to be incorporated into the new loan balance or offset through lender credits. Those approaches can reduce the amount paid at closing, but they do not necessarily eliminate the economic cost of refinancing.
How Do You Calculate the Refinance Break-Even Point?
A simple break-even calculation compares your upfront refinancing costs with your estimated monthly savings.
Refinance Costs / Monthly Savings = Approximate Break-Even Period
For example, if refinancing costs $6,000 and reduces your monthly payment by $250, the simple break-even period would be approximately 24 months.
That calculation is useful, but it does not tell the entire story. If refinancing restarts your mortgage with a longer term, a lower monthly payment could partly result from spreading repayment over more years. Compare the new loan term and total borrowing cost along with the monthly payment.
Should You Refinance Before Your ARM Adjusts?
There is no universally best time to refinance an ARM. Refinancing before an adjustment may make sense if you value payment stability and the available fixed-rate terms support your financial goals.
On the other hand, keeping the ARM could make sense if its current rate remains attractive, its adjustment limits are manageable, or you expect to sell the home before the potential benefits of refinancing outweigh the costs.
Do not make the decision based only on predictions about future mortgage rates. Compare the fixed-rate option available today with the actual adjustment provisions in your existing mortgage.
ARM to Fixed-Rate Refinance Checklist
Before refinancing, compare your current mortgage with the proposed new loan:
- Current ARM rate and next adjustment date
- Index, margin, and adjustment caps
- New fixed interest rate and APR
- Current and proposed monthly principal and interest payments
- Closing costs and lender credits
- Remaining term on your ARM versus the new loan term
- Estimated break-even period
- How long you expect to keep the mortgage
Looking at these factors together can provide a clearer answer than simply asking whether today's fixed rate is lower than your current ARM rate.
Is Refinancing Your ARM Into a Fixed-Rate Mortgage Worth It?
Refinancing an adjustable-rate mortgage into a fixed-rate loan can reduce uncertainty by replacing a rate that may change with one that remains fixed. That stability can be valuable for homeowners who expect to keep their property and prefer predictable principal and interest payments.
But refinancing is not automatically a money-saving decision. Consider closing costs, the new loan term, your current ARM's adjustment limits, and how long you expect to keep the mortgage.
Loan Wolf Lending can help Florida homeowners compare their existing ARM with available fixed-rate refinance options. Call 754-755-3075 to discuss your refinancing goals.
Please note: Refinancing may result in higher finance charges over the life of the loan. Mortgage terms and qualification requirements vary by borrower, property, loan program, and lender.