Can & Should You Refinance an ARM into a Fixed Rate Mortgage (2024)

FAQs

Can & Should You Refinance an ARM into a Fixed Rate Mortgage? ›

Refinancing can be done for many reasons, but switching from an adjustable-rate mortgage (or ARM) to a fixed-rate mortgage is one of the most common. The general rule of thumb is that refinancing to a fixed-rate loan makes the most sense when interest rates are low.

It's typically worth it to refinance an adjustable-rate mortgage (ARM) if you can save money on your monthly payment and recoup your closing costs within a reasonable time frame. Or, if you're looking to stabilize your monthly payments, it can make sense because it allows you to switch to a fixed-rate loan.

A convertible ARM allows you to change your adjustable-rate loan to a fixed-rate loan after a set fixed-rate period expires — usually five, seven, or 10 years into the loan term. If you choose to convert your mortgage when the introductory rate period ends, you typically have to pay a small fee to exercise this option.

You might have to pay a prepayment penalty if you sell or refinance. If you do decide to refinance your adjustable-rate mortgage to get a lower interest rate, you could be hit with a prepayment penalty, also known as an early payoff penalty.

An ARM may be a better option in several scenarios. First, if you intend to live in the home only a short period of time, you may want to take advantage of the lower initial interest rates ARMs provide. The initial period of an ARM where the interest rate remains the same typically ranges from one year to seven years.

ARMs tend to have lower starting rates than fixed-rate loans, but can get more costly after the introductory period ends. ARMs tend to work best for those who know they'll sell the home after a few years or can afford payment jumps.

The fee will range from 0.375% to 5.125% of the loan amount. An adjustable-rate mortgage (ARM) is a loan that has a low, initial fixed rate for the first few years and then changes based on the terms of the ARM you choose.

ARMs gain popularity when their introductory interest rates are lower than those for fixed-rate mortgages. The resulting smaller monthly payments give borrowers more homebuying power. But the rate and monthly payment on an ARM have the potential to rise, which could make the payments difficult to afford.

After the fixed introductory period, the rate on an ARM adjusts periodically to reflect market rates. Most ARMs adjust every six or 12 months. If interest rates go down, an ARM's rate can go down as well.

Can a 5 year ARM be refinanced? ›

You can refinance an adjustable-rate mortgage, and it's just as easy as refinancing any other loan. By refinancing, the borrower is replacing their existing loan with a new, updated loan – usually a fixed-rate mortgage.

Yes. You can refinance from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage when you qualify for a new loan. Homeowners often think about refinancing their adjustable-rate mortgages when interest rates go down or when the interest rate on their adjustable-rate mortgage is ready to reset.

One drawback of ARMs is that the interest rates fluctuate over time. After the initial fixed-rate period, the interest rate on an ARM is adjusted periodically based on changes in the chosen financial index. Therefore, borrowers risk receiving rising interest rates.

A 5/1 adjustable-rate mortgage (ARM) loan may be worth considering if you're looking for a low monthly payment and don't plan to stay in your home long. Rates on 5/1 ARMs are typically lower than 30-year fixed-rate mortgages for those first five years.

The benefit of a fixed-rate mortgage is that your interest rate stays consistent. But your monthly mortgage bill can still change — in fact, it generally fluctuates at least a little bit every year. Rising home values and insurance premiums have caused unusually dramatic increases for some homeowners in recent years.

For some first-time home buyers or refinancers, a 7/6 ARM could be a good option for saving money since it tends to offer low rates along with 7 years of fixed payments, 2 years more than the popular 5/1 ARM.

Amid the current high-interest-rate environment, an ARM can offer a more affordable mortgage payment. But the introductory interest rate that makes your monthly payments cheaper won't last forever.

Most ARMs adjust every six or 12 months. If interest rates go down, an ARM's rate can go down as well. This makes ARMs an appealing option if you think rates will trend lower in the years ahead. At the same time, if interest rates increase and the ARM's rate adjusts higher, you would need to cover the difference.

ARMs usually kick off with lower interest rates compared to fixed-rate mortgages; by the time the introductory period ends and the ARM resets, rates may have fallen, enabling borrowers to enjoy the benefits without having to refinance their loan.