Refinancing an ARM into a fixed-rate mortgage
Quick insights
- Refinancingfrom an ARM to a fixed-rate mortgage can help lock in stable monthly mortgage payments and protect against future interest rate hikes.
- Timing your mortgage refinance before your ARM’s interest rate adjusts can save you money over the life of the loan.
- Comparing multiple mortgage lenders and loan terms is important to finding the most cost-effective fixed-rate option.
Adjustable-rate mortgages (ARM) can make sense at first, especially when interest rates are low and monthly mortgage payments fit comfortably. But it’s normal to feel a bit uncertain when the low initial rate on an ARM is about to reset. Suddenly, the question isn’t just about the house, but how much the mortgage will cost next year, and the year after. Refinancing into a fixed-rate mortgage can bring some peace of mind with steady payments that won’t shift with the housing market and broader economy.
In this article, we will cover how refinancing an ARM to a fixed-rate mortgage works, the major differences between the loan types and steps to take if you’re considering making the switch.
Can you refinance an ARM loan?
Yes, you can refinance an ARM loan into a fixed-rate mortgage. Some homeowners choose to refinance before the adjustable period begins to secure a more stable interest rate for the remainder of the loan term. This step can help you manage the risk of monthly payment increases if mortgage rates happen to rise, and the process works much like a traditional mortgage refinance.
Adjustable-rate mortgage vs. fixed-rate mortgage
An ARM starts with a lower interest rate, but that rate can change over time, while a fixed-rate mortgage locks in one rate for the entire term of the loan. Homeowners comparing a fixed vs. adjustable-rate mortgage may want to weigh stability against potential savings.
Interest rate:
- ARM: An ARM typically begins with a lower interest rate, but that rate can change after the initial fixed period ends. Depending on the loan terms, adjustments may occur annually, every six months or even monthly, and are influenced by prevailing mortgage rates. A fixed-rate mortgage locks in one rate for the entire loan term, offering more predictable payments for homeowners.
- Fixed-rate mortgage: The rate stays the same for the entire loan term, regardless of broader market changes.
Monthly payment stability:
- ARM: Mortgage payments are generally stable during the introductory period (usually lasts 3, 5, 6 or 10 years depending on the loan). After this period, monthly payments can adjust periodically and may increase based on market interest rates.
- Fixed-rate mortgage: Monthly payments are consistent, which can make budgeting slightly easier for homeowners.
Long-term cost:
- ARM: Long-term costs may be lower in the early years, but it could become more expensive if interest rates increase.
- Fixed-rate mortgage: Long-term costs may start with a higher interest rate, but fixed-rate mortgages provide payment certainty for the life of the loan.
How to refinance an ARM
Refinancing from an ARM to a fixed-rate mortgage involves reviewing your financial situation, researching various mortgage lenders and comparing available options for the best rates and terms.
Here are several key steps to refinance from an ARM loan to a fixed-rate loan:
- Evaluate your current loan and financial goals. Review your ARM’s terms, upcoming adjustment dates and how stable payments could fit in your budget and plans.
- Research and compare loan providers. Look for competitive fixed-rate mortgage options, compare interest rates, loan terms and closing costs.
- Gather your financial documents. Prepare pay stubs, W-2s, credit information and details about your current mortgage to streamline the application.
- Submit your refinance application. Apply with your chosen mortgage lender and provide the requested information.
- Complete underwriting and appraisal. The loan provider reviews your mortgage refinance application and orders a home appraisal to confirm your home’s value.
- Review loan terms and close. Before closing, you will receive a Closing Disclosure that outlines your final loan terms (loan amount, interest rate), monthly mortgage payment breakdown, and closing costs and any fees associated with the refinance so you can review everything before signing.
ARM refinance requirements
To refinance an adjustable-rate mortgage (ARM) into a fixed-rate mortgage, homeowners must meet specific lender requirements. These requirements help to make sure you qualify for the new loan and have the ability to manage payments comfortably. The ARM refinance requirements consist of the following:
- Sufficient credit score, typically 620 or higher depending on the loan provider.
- Stable employment and verifiable income to support the new mortgage payment.
- Acceptable debt-to-income (DTI) ratio, usually a DTI below 36%, but some lenders may consider ratio up to 43% or even higher (especially if you have compensating factors like a strong credit score or large down payment).
- Adequate home equity, often at least 20% to avoid a private mortgage insurance (PMI) requirement.
- Property appraisal to confirm current market value.
- Documentation including tax returns, pay stubs and current mortgage statements.
Pros of refinancing an ARM to a fixed-rate mortgage
Refinancing from an ARM to a fixed-rate home loan can offer many benefits that provide peace of mind and financial predictability.
Pros
- Provides stability with fixed monthly payments. This helps homeowners budget effectively without worrying about fluctuations in market rates.
- Fixed-rate loans offer protection against rising interest rates, which could increase monthly mortgage payments once the ARM adjustment period begins.
- If interest rates rise over time, it can lead to potential long-term savings.
- Fixed-rate mortgages may remove uncertainty by locking in a consistent interest rate for the life of the loan, possibly reducing financial stress for homeowners.
- They may improve your credit profile by demonstrating your ability to qualify for a more traditional, fixed-rate home loan.
Cons of refinancing an ARM to a fixed-rate mortgage
Although refinancing from an ARM to a fixed-rate loan offers many advantages, it’s important for homeowners to consider potential drawbacks before proceeding.
Cons
- Fixed-rate mortgages might involve a higher initial interest rate compared to the introductory ARM rate, which could increase your monthly mortgage payments.
- Refinancing usually includes closing costs and fees such as appraisal fees, application fees and title insurance. This can add up and impact your overall savings.
- By moving into a fixed-rate mortgage, homeowners could miss out on potential savings if interest rates decrease in the future, since the rate is locked in for the full loan term.
- Refinancing from an ARM to a fixed-rate loan may not provide substantial financial benefits if the homeowner plans to sell their home or move within a few years because the upfront costs might outweigh the savings.
- The new loan term could be longer and reset the amortization schedule, possibly increasing total interest paid over time.
- The refinancing process can take a lot of time and paperwork. This could be a major inconvenience for some homeowners.
How to decide whether to refinance from an ARM to a fixed-rate?
When deciding whether to refinance from an ARM to a fixed-rate mortgage, it depends on your personal financial situation. It helps to take into account your long-term homeownership plans and current market conditions. Seeking advice from a mortgage professional or financial advisor can provide personalized guidance to make the best choice.
In summary
Making the choice to refinance an adjustable-rate mortgage (ARM) into a fixed-rate mortgage is a significant financial choice that depends on your current individual circumstances, financial goals, long-term homeownership plans and current market conditions. Locking in a fixed interest rate can provide payment stability and protect against rising interest rates. However, it’s key to weigh the potential benefits and drawbacks and how long you plan to stay in the home.
Take the time to compare mortgage providers when considering refinancing. It’s important to understand your loan options and potentially consult with a Home Lending Advisor to help you make an informed decision.
