You can refinance an adjustable-rate mortgage (ARM). This allows you to buy a home with a lower starting rate, but refinance later when your rate climbs.
You can refinance an adjustable-rate mortgage (ARM) just like you could with any other type of mortgage. The option to refinance could make an ARM appealing if youre looking to buy a home and want to start with the lower rate—and monthly payment—that ARMs can offer, but youre worried about future rate increases.
Refinancing is also an option if you have an ARM and want to lock in a fixed rate. However, closing costs and potential prepayment penalties could make it expensive to refinance an ARM.
Adjustable-rate mortgages (ARMs) can be great options for homebuyers who plan to sell or refinance their home within a few years. The initial interest rates are usually very low, keeping your monthly payments affordable. But once the introductory period ends, your rate can fluctuate significantly based on market conditions. So can you refinance an ARM loan if rates increase too much?
The short answer is yes You can refinance an ARM to a fixed-rate mortgage or even another ARM While refinancing comes with closing costs, it may be worthwhile if you can secure a much lower interest rate. This article will provide a comprehensive guide on refinancing ARMs, including
- How refinancing an ARM works
- Benefits of switching to a fixed-rate mortgage
- Tips for getting the best refinance deal
- When it makes sense to refinance your ARM
Let’s get started!
How Does Refinancing an ARM Work?
The process of refinancing an ARM is very similar to refinancing any other type of mortgage.
Here are the basic steps
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Shop around and compare offers. Don’t just go with your current lender. Get rate quotes from multiple lenders so you can find the best deal.
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Choose a lender and apply. Gather all required financial documents and complete the lender’s loan application
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Get the home appraised. The lender will order an appraisal to confirm the home’s current value. You’ll have to pay for this upfront.
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Go through underwriting. The lender will verify your finances, property value, and other information.
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Close on the refinance. After underwriting is approved, you’ll pick a closing date to sign paperwork and pay closing costs.
To qualify for refinancing, you’ll generally need a credit score of at least 620, a debt-to-income ratio below 50%, and at least 20% equity in the home. Meeting these requirements helps ensure you get approved for the best possible rate.
Benefits of Refinancing an ARM to a Fixed-Rate Loan
There are several advantages to refinancing an adjustable-rate mortgage to a fixed-rate loan:
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Predictable payments. Your monthly mortgage payment will never change for the entire loan term when you choose a fixed rate. This makes budgeting much easier.
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Potentially lower rate. If rates have fallen since you originated your ARM, refinancing could secure you a lower fixed rate for the long haul.
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Avoid payment spikes. When your ARM adjusts, your new rate could be significantly higher than your starter rate. Refinancing lets you lock in a rate before that happens.
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Customize the term. You can refinance into a 30-year or 15-year fixed-rate mortgage, whichever meets your needs. The 15-year option offers lower rates but higher monthly payments.
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Cash out equity. A cash-out refinance allows you to tap your home equity to pay off debts, fund home improvements, or make other major purchases if needed.
Tips for Getting the Best ARM Refinance Deal
Follow these tips when shopping for an ARM refinance:
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Check your credit. Improving your credit score before applying can help you qualify for better rates. Pay down balances and correct any errors on your reports.
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Research multiple lenders. Compare offers from banks, credit unions, and online lenders. Ask about rates, fees, and closing costs.
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Compare ARM options too. While fixed-rate loans offer stability, you may find a new ARM with better terms than your current one.
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Think about your timeline. How long do you plan to stay in the home? Refinancing to a 30-year mortgage only makes sense if you’ll keep it long enough to recoup closing costs.
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Ask about discounts. Many lenders offer discounts for automatic payments, having multiple accounts with them, or being a certain age.
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Lock your rate. Rates fluctuate daily. Locking in your rate as soon as possible protects you from increases.
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Review closing docs carefully. Make sure the interest rate, terms, fees, and other details match what you were quoted.
Taking these steps will help you secure the optimal refinance deal on your ARM loan.
When Does it Make Sense to Refinance an ARM?
In general, refinancing an adjustable-rate mortgage to a fixed-rate loan makes the most sense in these situations:
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When your ARM rate is about to adjust higher. If your starter rate was very low, your new adjusted rate could be a lot higher. Locking in a fixed rate before that change happens prevents a shocking payment increase.
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If interest rates have fallen since you got your ARM. You may be able to refinance to a fixed rate that’s lower than your current ARM rate, saving significantly on interest costs over the life of the loan.
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When you want payment stability. Refinancing to a fixed-rate mortgage allows you to lock in your principal and interest payment for the entire loan term.
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If you plan to stay in the home long-term. Refinancing only makes sense if you’ll keep the mortgage long enough to recoup closing costs through interest savings.
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To consolidate debts. A cash-out refinance lets you tap equity to pay off higher-rate debts like credit cards, auto loans, etc. This can simplify your finances.
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To fund home renovations. Similarly, a cash-out refi provides funds for remodeling projects that may make your home more livable, comfortable, or valuable.
The bottom line is that refinancing an ARM can be advantageous in many situations. To determine if it makes sense for you, compare current rates and run the numbers while accounting for your individual financial goals.
Frequently Asked Questions About Refinancing ARMs
If you’re still wondering if you should refinance your adjustable-rate mortgage, here are answers to some common questions:
Can you refinance with the same lender?
Yes, you can refinance with your current lender if they offer competitive rates and terms. But it’s wise to also get quotes from other lenders for comparison.
Does refinancing an ARM require appraisal?
Most lenders will require a new home appraisal before refinancing your ARM to ensure the property value supports the loan amount.
Can closing costs be added to the loan amount?
In most cases, yes. Adding closing costs to the loan balance increases the total amount you’re borrowing. This raises your loan-to-value ratio but avoids out-of-pocket costs.
Does refinancing restart the clock on mortgage terms?
Yes. When you refinance an ARM to a 30-year fixed-rate loan, you begin a new 30-year repayment term. Your monthly payments will be based on the new loan amount, rate, and remaining 30-year term.
Is a higher credit score needed to refinance?
Not necessarily, but having a higher score than when you originated your ARM could qualify you for better refinance rates. Lenders generally require at least a 620 FICO score.
How long does it take to refinance an ARM?
The refinance process typically takes 30-60 days from application to closing. Having all needed documents handy speeds things up. Be sure to lock your rate so it doesn’t rise during the process.
The Bottom Line
Refinancing an adjustable-rate mortgage can make excellent financial sense, especially if your ARM rate is about to adjust upwards. Switching to a fixed-rate loan locks in a stable interest rate and payment for the long haul.
To get the best deal on an ARM refinance, research multiple lenders, compare loan offers, and move quickly once you decide to apply. With some effort, you can secure favorable terms that provide payment predictability and potentially significant interest savings over the life of your home loan.
How Much Does Refinancing an ARM Cost?
Refinancing can make financial sense and eliminate some of the risk of having an adjustable-rate loan, but there are also upfront costs to consider.
- Closing costs: Similar to when you first get a mortgage, youll have to pay closing costs for your new mortgage, which can range from about 2% to 5% of the loans balance. Some mortgages advertise no closing costs, but they have higher interest rates or the costs get rolled into your loan amount.
- Prepayment penalties: In addition to your closing costs, some ARMs have prepayment penalties, which could cost you thousands of dollars. But look over your loans terms carefully as the prepayment penalty may only apply during the initial period.
Is It Possible to Refinance an Adjustable-Rate Mortgage?
Refinancing an ARM is similar to refinancing a fixed-rate mortgage. Youll need to qualify and apply for the new mortgage and then use the proceeds to pay off your ARM. You can also refinance with different types of new mortgages, such as a 20- or 30-year fixed-rate mortgage, or you could even refinance with a new ARM.
Refinancing ARMs can be especially appealing because the interest rate and monthly payment can increase once the rate changes start. For example, with a 5/1 ARM, the interest rate is fixed for five years and then adjusts once per year for the rest of the loan term. With a 7/6 ARM, its fixed for seven years and then adjusts every six months.
Although ARMs may have caps on how much your interest rate can increase with each adjustment and overall, a rising rate could significantly increase your payment and how much interest accrues. Refinancing to a lower or fixed-rate loan can help.
However, theres no guarantee that youll be able to sell your home for a good price or qualify to refinance before your ARMs rate starts to change. When considering an ARM, calculate the maximum possible monthly payment to understand how much you could wind up having to pay.