Current ARM refinance rates

Similar to a fixed-rate mortgage refi, you’ll want to shop around and make sure you’re getting the best possible deal. You’ll need to verify your financial profile with your lender and will eventually have to sign a mountain of documents at closing.

Lender requirements vary for all kinds of mortgage applicants, but in general, you’ll get a better deal if you have a higher credit score and strong overall finances.

The most common types of ARMs are also known as hybrid ARMs. These have initial fixed-rate periods followed by a floating rate for the remainder of the loan. Hybrid ARMs include:

• 3/1 ARM: The first three years have a fixed rate followed by a floating rate for the remainder of the loan.
• 5/1 ARM: The first five years have a fixed rate followed by a floating rate for the remainder of the loan.
• 7/1 ARM: The first seven years have a fixed rate followed by a floating rate for the remainder of the loan.
• 10/1 ARM: The first 10 years have a fixed rate followed by a floating rate for the remainder of the loan.

Usually, 5/1 ARMs have the lowest interest rate of the bunch. For those who think they’ll refinance or sell within five years, this could be a cost-effective mortgage option.

Of course, it’s also a gamble. If your income or credit situation changes for the worse, you might not be able to refinance. If you can refinance, you might end up with a higher rate than if you would have gotten a fixed-rate loan in the first place.

Most ARMs have a rate cap, which limits how much your interest rate can go up. There are two types of caps:

• Period adjustment cap: How much your rate can go up or down within an adjustment period
• Lifetime cap: Limits rate increase throughout the lifetime of the loan (by law ARMs must have a lifetime cap)

Keep in mind that a drop in interest rates doesn’t mean your monthly payments will go down (or up) right away. Some lenders may hold on to some or all of the rate decline and move it over to the next adjustment period — referred to as a carryover.

For example, if your rate cap is 1 percentage point and interest rates went up by 2 percent, your lender can hold onto the “extra” 1 percent and increase your monthly payment in the future even if the index rate hasn’t gone up.

The London Interbank Offered Rate (LIBOR) is a benchmark rate that helped inform interest rates on ARMs, among other financial products. Due to limitations that made it unreliable, LIBOR is phasing out and being replaced by the Secured Overnight Financing Rate (SOFR). The difference: With LIBOR ARMs, the adjustment to the rate occurs once per year. With a SOFR ARM, that change takes place every six months. Many banks ceased originating products tied to LIBOR at the end of 2021, but you might still see some LIBOR ARMs advertised on Bankrate for the time being.