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Refinance ARM: Can You Refinance To A Fixed-Rate Mortgage?

Laura Gariepy5-minute read

January 10, 2023


When you became a homeowner, you decided on an adjustable-rate mortgage (ARM). Years later, you’re wondering if you should refinance your loan. We’ll discuss when it makes sense to refinance, the process of refinancing to a fixed-rate mortgage and other important information. That way, you can decide if you should stay with an ARM or move to a fixed-rate mortgage.

Adjustable-Rate Mortgage Vs. Fixed-Rate Mortgage

So, what’s the difference between an adjustable-rate mortgage vs. a fixed-rate mortgage? We’ll compare the two options here.

What Is An Adjustable-Rate Mortgage?

An adjustable-rate mortgage is precisely what it sounds like: your mortgage’s interest rate adjusts periodically over the life of the 30-year loan. An ARM starts with a low, fixed interest rate for an introductory period of 5, 7 or 10 years. Once the initial period is over, your rate will become adjustable and will depend on current market trends.

Generally, your interest rate will adjust every 6 months or once a year, depending on the terms of your loan. If you have an ARM with a 7-year introductory period and the scheduled interest rate changes twice annually after that, you’ll see it documented as a 7/6 ARM. The first number will always be the length of the initial period, and the second will always be how often you can expect the rate to adjust once that period is over. In the case of a 7/6 ARM, you can expect your rate to adjust every 6 months after your initial period of 7 years.

ARM Rate Caps

ARMs have a set margin, which is the lowest the interest rate can go throughout the loan. There are also three different rate caps to limit how much the interest rate can fluctuate (up or down) over a specified period:

  1. Initial: Immediately after the fixed rate ends
  2. Periodic: Between each rate period
  3. Lifetime: Over the 30 years

On your loan paperwork, you’ll see your rate caps expressed as a series of numbers with slashes, such as 2/1/5. That means your first adjustable rate can’t fluctuate more than 2% from your introductory rate, your rate can’t change more than 1% each period and your rate can’t deviate more than 5% during the life of the mortgage.

When Taking Out An ARM Makes Sense

An ARM could be a good choice if current interest rates are high. You can catch a break during the introductory period because your mortgage lender may have the chance to increase your rate later. The mortgage could also be a good move if you plan to pay down your loan fast while the interest rate is low or move before the initial period is over.

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What Is A Fixed-Rate Mortgage?

A fixed-rate mortgage has fewer moving parts and is more predictable for borrowers. As the name implies, the interest rate remains fixed, or stable, throughout the life of the loan (often as long as 30 years). That means your monthly payment will stay relatively the same (aside from property tax and homeowners insurance increases over the years) for as long as you have your mortgage.

A convertible ARM starts with an adjustable rate but allows you to lock in a fixed rate at a specified point during your loan, which is usually between 1 – 5 years. This mortgage could be a good move if you expect interest rates to fall over time (though it’s nearly impossible to predict).

When Should You Consider Refinancing Your ARM?

You might want to think about refinancing your ARM (also known as a rate-and-term refinance) if you:

  • Want the budget stability of a fixed-rate loan

  • Can secure a lower interest rate than you’re currently paying on your ARM

  • Are coming to the end of your ARM’s introductory period and want to avoid an interest rate increase and larger mortgage payment

  • Would like a shorter loan term

  • Have sufficient home equity and want to take cash out of your home

To see if refinancing your ARM is a wise financial move for you, use the Rocket Mortgage® Refinance Calculator.

Adjustable-Rate Refinance Rates

ARM refinance rates continuously fluctuate and are determined using several factors, such as the current interest rates, the lender you go through and the Secured Overnight Financing Rate (SOFR) index and cap. Refinance rates include the current interest rate and the annual percentage rate (APR).

Your APR tells you the full cost of borrowing money over the life of the loan. It includes your interest rate and fees for underwriting, closing and other aspects of processing your mortgage.

Review the current fixed-rate mortgage rates to see if ARM refinancing makes sense for you.

Can You Refinance An ARM Loan?

Refinancing your ARM loan is a possibility and is just as easy as refinancing any other loan. With this process, the borrower is essentially replacing their existing loan with a new updated loan.

How To Refinance From An ARM To A Fixed-Rate Mortgage

If you decide to refinance from an ARM to a fixed-rate mortgage, there’s good news! The refinancing process is relatively straightforward and is similar to when you purchased your home.

When you refinance, you take out another loan that gets used to pay off your original note. Then, you pay on the new mortgage. You don’t need to go through the same lender, so you should shop around for the best rate before committing.

Once you’ve chosen a lender, it’s time to apply for the new loan. The bank will need to review your finances to ensure you can pay the mortgage. Underwriters will look at your income, credit score, assets and other debt.

You’ll likely need to provide pay stubs, bank statements and W2s to verify your income. If you’re self-employed, you’ll have to show 2 years’ worth of federal tax returns and profit and loss statements.

It’s probably a smart idea to lock in your interest rate when you apply. That way, you can avoid getting hit with a higher rate (and more expensive home loan) at closing.

ARM Refinance Requirements

Although each lender has its own rules, here are some general mortgage refinance requirements to keep in mind:

  • Length of homeownership: Typically at least 6 months

  • Home equity: Generally 20% or more

  • Credit score: Conventional: 620; FHA: 580 – 620; VA: 580

  • Debt-to-income (DTI) ratio: Usually under 50%

Your DTI measures how much debt you have in relation to your income. A DTI of 50% means that half of your earnings go towards repaying loans. Lenders like to see a lower DTI because it means the new mortgage won’t stretch you too thin financially.

ARM Refinance Closing

Before closing, the lender will order a property appraisal. The bank needs to verify that the home is worth at least as much as you’re trying to borrow. If the appraisal goes well and your application is approved, you’re clear to close.

When you finalize your new mortgage, you can expect to pay closing costs. Your lender may let you roll these costs into your loan, which will allow you to keep more money in the bank.

The Bottom Line: Refinance Your Adjustable-Rate Mortgage Only If It Makes Sense

At first glance, refinancing your ARM to a fixed-rate mortgage might look very appealing. But we encourage you to review your finances and future plans carefully before deciding if refinancing is right for youIf refinancing makes sense, you can apply online or give us a call at (833) 326-6018.

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Headshot Laura Gariepy

Laura Gariepy

Laura Gariepy is the Owner of Every Day by the Lake, LLC, a freelance written content creation company that helps busy business owners stay top of mind with their target audience. She is also a coach to aspiring freelancers and has recently launched a signature private coaching program called Before You Go Freelance. When not writing or coaching, Laura loves to travel and spend time by the lake with her family.