70% of American homeowners regret choosing an adjustable-rate mortgage. ARMs can be attractive initially due to their lower interest rates. However, they often lead to financial uncertainty due to variable mortgage rates.
A fixed-rate mortgage provides a stable rate and financial security against future rate hikes. To determine how much you can save, consult a mortgage lender for detailed information and personalized advice.
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What Is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage (ARM) is a home loan with a variable interest rate. The initial interest rate is fixed for 5, 7, or 10 years. After this period, the rate adjusts periodically, often yearly. The new rate depends on financial indexes like the LIBOR or the U.S. treasury rate.
Your monthly mortgage payments can increase or decrease based on these adjustments. An ARM often starts with a lower rate than a fixed mortgage, leading to lower initial mortgage payments.
Common ARMs Types
| ARM Name | Fixed-Rate Period (Years) | Adjustment After Fixed Period |
| 3/6 ARM | 3 | Every 6 months |
| 5/6 ARM | 5 | Every 6 months |
| 7/6 ARM | 7 | Every 6 months |
| 10/6 ARM | 10 | Every 6 months |
| 3/1 ARM | 3 | Every year |
| 5/1 ARM | 5 | Every year |
| 7/1 ARM | 7 | Every year |
| 10/1 ARM | 10 | Every year |
Can You Refinance an ARM Loan?
Yes, you can refinance an ARM loan. Refinancing an ARM means replacing it with a new loan, often a fixed-rate mortgage. This switch offers stable and predictable monthly mortgage payments.
How Can You Refinance an ARM Loan?
Here are the steps you can follow to refinance your ARM loan:
- Evaluate Your Finances: Check your credit score, income, and debt payments. A good credit score helps get better loan rates.
- Research Lenders: Compare different mortgage lenders to find the best interest rates and loan terms. However, read reviews to see if the lender has good customer service. Prequalify with different lenders to see what better options you have.
- Choose a Loan Type: Choose between a fixed-rate mortgage for stable mortgage payments or another ARM with better loan terms.
- Apply for the Loan: Gather all necessary documents, like ID, income proof, and details of your current loan. Fill out the application form and submit it to your chosen mortgage lender.
- Get an Appraisal: The lender will check your home’s value with an appraisal. Clean and fix up your home to get a good value. Make sure the assessment is accurate.
- Close the Loan: First, review all the documents before sign. Ready to pay closing costs, such as loan and appraisal fees. Finally, sign the papers to finish the refinance process.
What Are the Requirements for an ARM Refinance?
Here are the requirements for an ARM refinance:
Credit Score
Your credit score shows how good you are at paying back loans. To refinance your ARM, you need a score of at least 620. A score above 700 is even better and helps you get lower interest rates.
Debt-To-Income (DTI) Ratio
The DTI ratio compares monthly debt payments to income. Lenders prefer a DTI of 43% or lower. A DTI of 35% or less is ideal. Conventional refinance loans allow up to 50%, FHA rate-and-term up to 43%. And FHA streamline has no strict cap.
Equity in Your Home
Home equity is the part of your home that you own outright. To refinance, you usually need at least 20% equity in your home. This means your loan-to-value ratio should be 80% or lower.
Time Since Loan Closed
For most refinances, you need to wait about 6 months. However, for cash-out refinances, you might need to wait 6 to 12 months.
When Should You Refinance an ARM Loan?
Refinance an ARM when fixed mortgage rates are lower than your ARM’s future rates. By this way you can get a stable and lower rate.
Refinance before the first rate change to avoid higher payments. Moreover, consult a mortgage lender to help you make the right decision.
Benefits of ARM Refinance to You
Here are the benefits you will get by refinancing your ARM loan:
- Stable Mortage Payments: With a fixed-rate mortgage, your mortgage payments remain consistent. It makes you easier to manage your finances.
- Protection From Rising Rates: You won’t have to stress over rising rates and paying more later.
- Potential Long-Term Savings: Refinancing could lower your overall interest costs. And it will save you money over the life of the loan.
- Simplified Financial Planning: With a fixed-rate mortgage, you can plan your finances well, without worrying about fluctuating rates.
Should You Refinance an Adjustable-Rate Mortgage?
Refinancing an adjustable-rate mortgage (ARM) depends on:
- Current Mortgage Rates: If interest rates have risen since you obtained your ARM, refinancing might not be advisable. However, If your initial low-rate period ends, switch to a fixed-rate mortgage.
- Credit Score: A good credit score is crucial for favorable interest rates. If your score has improved since getting your ARM, refinancing might offer better terms.
- Financial Goals: Decide why you want to refinance. It could be to pay off your mortgage faster, have steady mortgage payments, or get cash for home improvements.
- Long-Term Plans: Consider how long you plan to stay in your home. If it’s only a few more years and your ARM rate is competitive, sticking with it might be wise.
- Closing Costs: Refinancing incurs closing costs, typically 2%-5% of the mortgage principal. Make sure you can afford these costs. Also, consider the interest you’ll pay if you add them to the new mortgage.
Bottom Line
ARM loan refinancing could save you about $42,274 in interest on a $300,000 mortgage. With current rates around 7.031% for a 30-year fixed-rate mortgage. Getting a stable rate now can protect you from future rate increases.
This means your average monthly mortgage payments won’t change, making it easier to manage your money. Talk to a mortgage lender to see how much you can save and make a smart choice for your future.
Frequently Asked Questions
Can an ARM be refinanced?
Yes, an ARM can be refinanced to a fixed-rate mortgage. Compare lenders, gather necessary documents, and close the new loan to secure a stable interest rate.
What are the benefits of refinancing from an ARM to a fixed-rate mortgage?
Refinancing from an ARM to a fixed-rate mortgage offers stability, protection from rate increases, and consistent payments.
When should I consider refinancing my ARM to a fixed-rate mortgage?
Refinance your ARM to a fixed-rate mortgage when fixed rates are lower. Read more details here.
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