Can You Refinance an Adjustable Rate Mortgage (ARM) Loan?

By Bill Lyons | Updated on February 2, 2024

The adjustable-rate mortgage (ARM) is characterized by its variable interest rates that shift with market conditions. Initially, ARM loans often come with lower interest rates than fixed-rate mortgages, making them an appealing choice for many homebuyers.

However, as time goes on and initial rate periods expire, homeowners with ARMs might face fluctuating interest rates, resulting in unpredictable monthly payments. Given this concern, can you refinance an ARM loan?

Yes, just like any other home loan, you can refinance an adjustable-rate mortgage. When refinancing an ARM loan, you can tap into home equity, secure a more predictable monthly payment, or benefit from favorable market conditions. Refinancing an ARM can be a strategic move, potentially saving you money while ensuring long-term financial stability.

Keep reading to learn more about refinancing an ARM mortgage.

ARM Refinancing Options

If you’re contemplating refinancing an adjustable-rate mortgage, you’ll be pleased to know that several options are available, each catering to different needs. Essentially, there are two types of home loans: Fixed-rate and adjustable-rate mortgages. Both are suitable routes for refinancing your ARM loan.

Let’s take a closer look at these two options below.

Refinancing to a fixed-rate mortgage

The most compelling reason homeowners transition from an ARM to a fixed-rate mortgage is the predictability it offers. Unlike fluctuating ARM loans, fixed-rate mortgages have consistent interest rates and monthly payments throughout the life of the loan.

Many factors can influence your decision when comparing adjustable-rate vs. fixed-rate mortgages. If you plan to stay in your home for many years, locking in a fixed rate can protect you from future interest rate hikes. This can be especially beneficial if current market rates are low, allowing you to lock in more favorable rates for the long haul.

Refinancing to a new ARM loan

Like your initial ARM, refinancing to a new ARM might offer lower introductory rates than fixed-rate mortgages, especially the 6-month SOFR. This option can be attractive if you plan on selling or refinancing again before the introductory period expires.

A new ARM might make sense if you’ll be moving or undergoing financial shifts in the next few years. You can take advantage of the initial low rates and potentially sell or refinance again before rates adjust.

Those with ARMs can also benefit from market conditions. If the market is trending toward lower interest rates or you believe it will in the near future, refinancing to a new ARM could allow you to capitalize on these conditions and save more in interest over the life of your loan.

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Pros & Cons of Refinancing an ARM Mortgage

Refinancing an ARM can offer a fresh start, allowing you to capitalize on favorable market conditions or shift to a more predictable mortgage structure. On the flip side, it’s not without its challenges and costs.

Consider the following pros and cons:

Pros of ARM refinancing

The potential benefits of refinancing an ARM loan include:

• Stabilized payments: Refinancing from an ARM to a fixed-rate mortgage ensures consistent and predictable monthly payments. This stability can improve budgeting and long-term financial planning.
• Potential interest savings: If current market interest rates are lower than what you’re paying on your ARM, refinancing could result in significant long-term savings.
• Equity access: Refinancing can allow homeowners to tap into their home equity, providing funds for home improvements, debt consolidation, and other expenses. If you are a veteran you can do a VA cashout refinance loan up to 100% of the value of your property.
• Renegotiate loan terms: Beyond interest rates, refinancing allows you to adjust other loan terms, like duration and specific conditions.
• Avoid rate fluctuations: If your ARM is due for an adjustment and the market rates are increasing, refinancing can help you circumvent potential spikes.

Cons of ARM refinancing

Like any other home loan, refinancing an ARM loan comes with potential pitfalls, such as:

• Closing costs: Just like your original mortgage, you’ll have to pay fees and closing costs. The potential savings from a lower interest rate can offset these costs. Keep in mind that closing costs vary depending on the lender, where you live, and, sometimes, the type of loan. For instance, closing costs for a VA ARM loan will differ because of specific VA requirements.
• Extended loan duration: If you refinance to another mortgage after several years into the original loan, you could be extending the total time it takes to pay off your home, leading to more interest paid over time.
• Prepayment penalties: Some ARMs come with prepayment penalties if you refinance or pay off the loan before a specific time.

Should You Refinance an Adjustable-Rate Mortgage?

Deciding whether to refinance an adjustable-rate mortgage is a significant financial consideration. Given the fluctuating nature of these loans, homeowners might consider refinancing to capitalize on favorable conditions or sidestep potential economic challenges.

Refinancing may be a good option for homeowners with an impending rate reset. If the introductory period of your loan is ending and the rates will adjust, refinancing might offer more favorable terms.

Refinancing may also make sense if market rates have dropped since your ARM was approved. Switching to a fixed-rate mortgage could lock in these lower rates for the duration of your loan, potentially saving you thousands of dollars.

At the same time, refinancing makes sense for individuals who plan to live in their home long-term for payment stability.

Of course, refinancing isn’t always the best choice for homeowners. If you plan on moving soon, the initial lower rates of your ARM might still be beneficial. Refinancing costs might outweigh the short-term benefits of a new loan. Similarly, there are higher costs associated with refinancing. Closing costs and fees might negate any potential savings.

Before making this decision, homeowners should calculate their break-even points to determine when savings from refinancing surpass the associated costs. Refinancing could be a good option if you plan to stay in the home beyond this point.

Keep in mind that refinancing can reset the clock on your mortgage, so it’s crucial to weigh the benefits of a lower rate against potentially paying more for a longer period of time.

Beyond these considerations, homeowners should also factor in their individual financial goals. For instance, refinancing may provide the capital necessary to invest or pay down high-interest debts. To establish and track your own financial goals, consider downloading the Griffin Gold app. Our financial wellness app gives you access to smart budgeting tools, lets you track the value of your home, provides you with specialized calculators, and much more.

How to Refinance an ARM Loan

Refinancing an adjustable-rate mortgage requires you to go through the mortgage loan approval process again and meet specific criteria. This includes:

• Credit score: Lenders typically like to see borrowers have a good or excellent credit score to qualify for refinancing since this ensures they can repay their mortgage obligations. A higher credit score also often translates to better interest rates and terms.
• Equity: Most lenders prefer homeowners to have at least 20% equity in their homes to refinance.
• Debt-to-income (DTI) ratio: Lenders often have a preferred DTI threshold of around 43% or lower.
• Proof of income: Steady and verifiable income demonstrates to lenders that you can comfortably cover the mortgage payments.
• Current loan status: To qualify for an ARM refinance, you must have a good payment history on your current mortgage.
• Property evaluation: An appraisal determines the present value of your home, which lenders use to solidify the loan-to-value (LTV) ratio and how much they’re willing to lend.

Find Out if Arm Refinancing Is Right for You

An ARM can initially offer attractive savings due to lower starting interest rates. However, homeowners may have to deal with unpredictable monthly payments as the rate adjustment kicks in. Refinancing can provide relief and offer a more stable payment structure.

Can you refinance an ARM loan? While you can, the real question is whether or not you should. Griffin Funding can guide you in making this decision. Our team can assess your unique situation, provide insights, and advise you on the best mortgage strategies for your future. Apply for a mortgage today.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.