Can You Refinance an ARM Loan to a Fixed-Rate Mortgage?

A Guide to Refinancing Your ARM to a Fixed-Rate Mortgage

Refinancing your adjustable-rate mortgage (ARM) to a fixed-rate mortgage can offer long-term financial stability, especially if rising interest rates are making your monthly payments unpredictable. In this guide, we'll walk through the key steps to refinancing your ARM, including the potential benefits and drawbacks. We'll also discuss when it makes sense to refinance, how to get started, and some common questions about switching from an ARM to a fixed-rate mortgage.

Can You Refinance an ARM to a Fixed-Rate Mortgage?

Yes, you can switch from an ARM to a fixed-rate mortgage by qualifying for a new loan. Mortgage refinancing requires your lender to underwrite and originate a new loan, which replaces your old one. Getting approved for a new, fixed-rate loan is based on factors like your credit score, income, debt-to-income ratio (DTI), employment history, and home equity.

Adjustable‑Rate vs. Fixed‑Rate Mortgages

An adjustable-rate mortgage is a mortgage where the interest rate changes throughout the life of the loan. Most ARMs have an introductory period that lasts a few years, during which the rate is fixed. One popular ARM is a 5/1 ARM, which keeps the same interest rate for the first five years of the loan. Afterwards, the rate may adjust once a year up to a certain limit called the lifetime cap. If you don't plan to own your current home for a long time, the lower introductory (or initial) rate can save you a substantial amount of money on your monthly mortgage payment.

With a fixed-rate mortgage, the interest rate stays the same throughout the life of the loan. This means your monthly principal and interest payments stay consistent, making it a popular option for buyers who want protection from rising interest rates and plan to stay in their home long-term. Deciding whether to keep your ARM or switch to a fixed-rate mortgage depends on what makes the most sense for your homeownership goals.

When To Refinance an ARM to a Fixed-Rate

A person may want to refinance their ARM to lock in a lower interest rate with a fixed-rate loan, especially if mortgage rates are currently low. Switching to a fixed-rate mortgage provides consistent monthly mortgage payments, which can offer more financial stability. Refinancing is also a smart move for those who plan to stay in their home long-term and/or want to avoid potential rate increases. If mortgage rates have dropped since the original loan was taken out, refinancing can lead to significant long-term savings.

Benefits of an ARM Refinance

Refinancing from an ARM to a fixed-rate loan can offer several benefits to homeowners. The fixed rate can be appealing to those who want consistent monthly payments, a lower interest rate, and plan to live in their home long-term, resulting in potentially big savings.

• Predictable payments: Refinancing to a fixed-rate mortgage eliminates the uncertainty of future rate increases. This gives homeowners consistent monthly payments over the life of the loan, whereas ARM payments can fluctuate month-to-month.
• Locking in a lower interest rate: If market conditions are favorable, refinancing allows homeowners to benefit from a fixed rate that's lower than the ARM's potential future rate increases.
• Appealing for long-term homeowners: A fixed-rate mortgage is ideal for those planning to stay in their home for many years or the entire mortgage term, providing long-term financial stability and cost predictability.
• Lifetime savings: Since a fixed-rate mortgage keeps the same interest rate over the life of the loan, it can protect against rising rates, potentially saving thousands of dollars in interest compared to an ARM that is kept for the full 30-year term.

Downsides of an ARM Refinance

On the contrary, refinancing from an ARM to a fixed-rate loan may also present some downsides. Refinancing means you'll likely have to start a new loan term and pay closing costs on the new mortgage, and you may also face prepayment penalties depending on your lender and current loan terms (Freedom Mortgage never charges prepayment penalties). Additionally, if interest rates drop, you may end up spending more money on interest with the fixed-rate mortgage rate.

• Restarting the loan term: Refinancing can extend the life of your loan, especially if you switch back to a new 30-year term, and potentially increases the total interest paid over the life of the loan.
• Closing costs: When refinancing an ARM to a fixed-rate mortgage, borrowers may face the downside of paying closing costs upfront or rolling them into the new loan. This can reduce the money you saved with an ARM or cause an increase in the overall loan balance.
• Prepayment penalties: Some ARMs include prepayment penalties that charge a fee if you pay off the loan early (which is what happens when you refinance). If you're not a Freedom Mortgage customer, verify this with your current lender to avoid unexpected fees.
• Higher interest rate: Fixed-rate mortgages often come with higher rates compared to the lower introductory rates of ARMs, which could mean higher monthly payments in the short term. It may be to your advantage to refinance to a new ARM. Freedom Mortgage will help you figure out which is your best choice and can save you the most money.
• Missed savings: Homeowners who refinance from an ARM to a fixed-rate mortgage may miss out on potential savings if interest rates change and continue to drop over time, as they'll be locked into a higher fixed rate.

How To Refinance an ARM

Refinancing an ARM typically involves a few key steps to ensure you're getting the best terms. First, evaluate your current loan and financial goals to determine if refinancing makes sense. Next, compare lenders, gather necessary documents (i.e. income verification, current mortgage statements, etc.), and complete the application process. Before applying, you can also get prequalified by Freedom Mortgage to get an estimate of the loan amount and terms you qualify for. Many homeowners choose to refinance an adjustable rate to save with a lower fixed rate or more favorable terms.

ARM Refinance Requirements

When refinancing an ARM, there are certain requirements a borrower must meet, based on the type of loan they are getting (conventional, FHA, or VA for example). Lenders look at factors such as your income, debt-to-income ratio (DTI), and your credit score. A higher credit score can help you qualify for better rates and loan terms. Meeting these requirements is key to a worthwhile mortgage refinance.

Costs to Refinance an ARM

There are various costs that borrowers should be prepared for when refinancing an ARM. These costs may include application fees, appraisal fees, and other closing costs, which can quickly add up to several thousand dollars. It's important to weigh these costs against the potential savings to decide if refinancing makes financial sense for you. Make sure your lender goes over this in detail with you.

ARM to Fixed-Rate Refi Frequently Asked Questions

Here are answers to some of the questions we commonly get about refinancing ARMs.

Does Refinancing from an ARM to a Fixed-Rate Mortgage Save Money?

Refinancing from an ARM to a fixed-rate mortgage can money, especially if mortgage rates are low and you're able to lock in a better rate before the rate on your ARM goes up. It also protects you from future rate increases, which can lead to significant long-term savings. However, potential savings depend on factors like closing costs, the new loan terms, and how long you plan to stay in the house.

Can You Refinance an ARM to Another ARM?

Yes, you can refinance an adjustable-rate mortgage with a new adjustable-rate mortgage. You'll want to compare the rate, terms, and costs of a new ARM against a fixed-rate mortgage and decide if refinancing to another makes the most sense for you.

Is There a Penalty for Refinancing an ARM?

There can be a penalty for refinancing an ARM if the loan includes a prepayment penalty for paying it off early. It's important to check your current mortgage terms, as some lenders charge fees if you refinance within a certain time frame, such as the first year of the loan. Again, Freedom Mortgage home loans do not have prepayment penalties.

Final Thoughts: Refinancing an ARM to a Fixed-Rate Mortgage

Whether you're planning to stay in your home long-term or just want more control over your finances, refinancing from an ARM to a fixed-rate mortgage might be the right move for you and could save you thousands of dollars. Getting prequalified for a refinance can help you understand the loan amount and terms you're eligible for. Get started on a refinance today with Freedom Mortgage.