Key takeaways

  • If you're nearing the end of your ARM loan's initial fixed-rate period, you might be considering refinancing to a fixed-rate mortgage if your interest rate will adjust up significantly.
  • A fixed-rate mortgage provides more predictability, as the interest rate and your monthly payment stay the same for the loan's duration.
  • You'll need to meet ARM refinance requirements to apply, and it's a good idea to compare offers from multiple lenders—not just your current lender.

If you’re nearing the end of the initial term on your adjustable-rate mortgage (ARM), you might be wondering if now is a good time to refinance to a fixed rate. Let’s break down how to refinance an ARM and when it’s a good idea to refinance to a fixed rate.

Can you refinance an ARM loan?

You can refinance an ARM loan and by doing so, you’ll replace your existing mortgage with a new one. In this case, it can be either another ARM or a fixed-rate mortgage.

With an ARM, many people choose to refinance due to their rate adjusting higher. It’s important to remember that refinancing isn’t free — you’ll have to pay closing costs. So, even if you’re refinancing to a much lower rate, it’s smart to calculate your break-even point to determine when you’ll start saving money.

Lenders typically offer specific mortgage refinancing loans, so you’ll use their refinance application form to apply. The fact that you already own the home can simplify the process.

Keep in mind that you can choose the lender when refinancing an adjustable-rate mortgage. It could be your current lender or a different one, depending on which institution can offer you the best rate, service and terms.

How to refinance an ARM

Refinancing an ARM is very similar to refinancing a fixed-rate mortgage. Before you start the process, make sure you meet the requirements. For a conventional mortgage, that generally means having a credit score of at least 620, a debt-to-income (DTI) ratio of 50 percent or lower and 20 percent equity or more (though some lenders will allow less). You may also need to own your home for at least six months or more.

If you meet these requirements, follow these steps to refinance your ARM:

  1. Get and compare quotes: Don’t just plan to refinance with your current lender. Instead, research multiple lenders and get quotes on rates, fees and terms that you can compare to find the best offer.
  2. Choose a lender and apply: Gather all of your financial documents and submit the paperwork to the lender of your choice.
  3. Schedule the appraisal: Most mortgage refinances require an appraisal. The lender will order it, and you’ll have to pay for it.
  4. Go through underwriting and close the loan: Just like when you applied for your initial mortgage, you’ll need to work with an underwriter to verify your finances. Once everything is in order, you’ll schedule a closing date where you’ll sign the paperwork and pay closing costs. Note: You can pay closing costs upfront or roll them into the loan.

Benefits of refinancing an ARM to a fixed-rate mortgage

ARMs are more complex than fixed-rate mortgages. Fixed-rate mortgages keep the same mortgage rate throughout the loan term (usually 15 or 30 years). In contrast, an ARM is a 30-year loan with a fixed rate for an introductory period (typically three to 10 years). After this period, the rate adjusts every 6 months or once per year, based on a specific market index.

There are benefits to refinancing an ARM to a fixed-rate mortgage. While ARMs may offer an initial lower rate than a fixed-rate loan, once that introductory rate ends, your payment can go up significantly.

The idea of trading away the uncertainty of an adjustable-rate mortgage for the certainty of a fixed-rate mortgage is appealing, especially if you’re expecting an adjustment in the next year or two. — Greg McBride, Bankrate Chief Financial Analyst

Here are the main benefits of refinancing an ARM to a fixed-rate mortgage:

  • Your payments are always the same: A fixed-rate mortgage gives you the certainty of predictable payments. Rather than wondering how the market and economic trends will impact your adjustable rate — and consequently your monthly payments — you’ll enjoy a bill that never changes for the entire loan term.
  • You can budget more easily: With a fixed-rate loan, the stable sum you put toward your major housing cost allows you to more effectively budget for the other expenses in your life, both now and in the future.
  • You still have options: If a 30-year mortgage sounds like a lifetime, you can also look at a 15-year fixed-rate mortgage. The interest rates on this type of loan are even lower than the rates for a 30-year fixed loan, but the tradeoff is that you’ll have higher monthly payments due to the accelerated timeline.

Should you refinance an adjustable-rate mortgage to a fixed-rate mortgage?

Can you refinance an ARM loan? Sure. But should you? The rising mortgage rates in recent years might make this less appealing if your ARM originated back in the pre-pandemic days.

On the other hand, if your introductory rate is about to end, refinancing might make sense. With rates much higher now than they were, say, five years ago, the rate jump you might experience could be a shock. If you can secure a lower rate on a fixed-rate loan than the rate your ARM is about to adjust to, choosing to refinance an ARM to a fixed rate is a smart move.

So, can your ARM loan be refinanced for your financial gain? To find out in your specific situation, consider your:

  • Credit score: You need to have a good credit score to get the best interest rate. “Someone coming up on the end of an ARM presumably has five or more years of timely mortgage payments on their credit history,” says Austin Kilgore, director of corporate communications at mortgage firm Achieve. “There’s a good chance their credit score is better now and they may qualify for something better.” If your score needs some work, however, you may want to wait.
  • Financial goals: Before applying, determine why you’re refinancing. For instance, do you want to pay off your mortgage sooner, have a more predictable payment or take cash out of your equity for home improvements or debt consolidation?
  • Longer-term plans: How long you plan on staying in the home is a big thing to consider before refinancing. “If you’re only looking at being at home for three or four more years and you have four years before it resets, and a new loan is not at least three-eighths of a basis point lower than your current rate, you might as well stay in your ARM,” says Ralph DiBugnara, founder of Home Qualified, a digital resource for homebuyers and sellers. “There’s no financial benefit to move forward into a fixed rate.”
  • Ability to afford closing costs: Refinance closing costs cost anywhere from 2 to 5 percent of your mortgage principal. That means, for a $300,000 mortgage, you may pay $6,000 to $15,000 in closing costs. You can roll these into your mortgage, but if you do that, remember that you’ll pay interest on them.

Bottom line on ARM refinance

Ultimately, can you refinance an ARM loan? Absolutely. But the ARM refinance only makes sense if it helps you toward your specific financial goals. Compare rates and crunch the numbers to see if refinancing your adjustable-rate mortgage is right for you.