Should You Refinance Your ARM Into A Fixed Rate Mortgage?


If you are nearing the end of your original variable rate mortgage (ARM) term, you may be wondering if now is the time to refinance and if you should move to a fixed rate.

Despite low mortgage rates, the majority of homeowners haven’t refinanced, according to a recent Bankrate survey, and many fear they aren’t saving enough to justify the cost. Still, with some ARMs having high caps on rate increases, the stability of a fixed monthly payment can make refinancing worthwhile.

“The idea of ​​trading the uncertainty of an adjustable rate mortgage for the certainty of a fixed rate mortgage is appealing, especially if you expect an adjustment over the next two years,” says Greg. McBride, CFA, chief financial analyst for Bankrate.

Can we refinance an ARM?

Like many types of loans, you can refinance an ARM. When you refinance an ARM, you are replacing your existing loan with a brand new one. In simpler terms, you’ll go through the pre-approval and underwriting process with a mortgage lender – this could be your current lender or another – as well as the appraisal process to determine the value of your mortgage. House. Once all of the paperwork is complete, you will issue a check for closing costs and you will have a new mortgage with new terms.

Is Now the Right Time to Refinance an ARM?

Overall, now is a great time to refinance due to low mortgage rates, but the perfect time for you depends on your financial goals and long-term plans, and your ability to pay closing costs. Here are some considerations to make:

How is your credit?

Refinancing is not an automatic money saver. You must have strong credit to qualify for the lowest rate and the greatest savings opportunity. If you’ve made timely payments on your ARM, it should help raise your credit score.

“Someone coming to the end of an ARM probably has five or more years of timely mortgage payments on their credit history,” says Austin Kilgore, director of digital lending at Javelin Strategy & Research. “Chances are their credit rating is better now and they can qualify for something better. “

While your credit might need some work, it’s best to wait to refinance until you’ve improved your score. Check your credit report for any errors, such as incorrect contact information – and if something is wrong, contact the credit reporting agency as soon as possible to have it fixed. If you can, pay off or pay off other debts and continue to make credit card and other loan payments on time each month.

What are your goals?

Besides locking in a low rate, think about any other goals that refinancing can help you achieve, such as paying off your mortgage early, refinancing with cash, or consolidating debt. Although a cash refinance increases the amount you owe, you will be able to use the funds for home improvements or other expenses or goals.

Also keep in mind that you are not the only one thinking about refinancing these days. Refinances made up 66% of claims recently, according to the Mortgage Bankers Association, and in July 2021, the average time to complete a refinance was 47 days, according to ICE Mortgage Technology. If your lender is overwhelmed with other requests, the process could take longer than expected, which could impact your decision.

How long do you plan to stay at home?

If you don’t plan on moving or selling your home anytime soon, refinancing into a fixed rate mortgage can be a smart move. However, if a move is looming on the short term horizon, refinancing is probably not worth the cost.

For example, if you save $ 100 on your monthly mortgage payment through refinancing and the closing costs are $ 2,000, it would take you 20 months, or almost two years, before you really start to save money. . Bankrate’s Mortgage Refinance Breakeven Calculator can help you calculate the numbers for your situation.

“If you plan to stay in your home for three or four more years and you have four years to go before the reset, and a new loan is not at least three-eighths of a basis point lower than your current rate , you might also stay well in your ARM, ”advises Ralph DiBugnara, founder of Home Qualified, a digital resource for buyers and sellers. “There is no financial benefit to going to a fixed rate. “

Should I refinance my fixed rate ARM?

At the very least, you should consider refinancing your ARM to a fixed rate if current mortgage rates are lower than the rate you are paying and you are nearing the end of your original ARM term. However, the rate is not the only piece of the puzzle. Consider the following:

How much could you pay when your ARM resets?

Take a look at your documents – or contact the mortgage department that processes your payments – to understand the annual limit and lifetime limit of your ARM. The annual cap will give you an idea of ​​how much the rate might increase when it is reset, and the lifetime cap is the maximum allowed for the life of the loan.

Are you paying an interest-only ARM?

If your ARM included an interest-only introductory period, you only had to pay the interest, not the principal. Although you have enjoyed low payments, you have not built up any equity in your home, so you will be surprised when you have to repay the actual loan. In this case, refinancing to a fixed rate option can be a particularly smart decision.

Benefits of a fixed rate mortgage

If you’ve never had a fixed rate mortgage, here are the main advantages of this type of loan:

  • Your payments are always the same. A fixed rate mortgage gives you the certainty of predictable payments. Rather than wondering how the market will affect your payments on an ARM, a fixed rate option never changes during the life of the loan.
  • You can budget more easily. With a fixed rate loan, you can provide for a stable housing payment.
  • You still have options. If a 30-year mortgage looks like a lifetime mortgage, you might also want to consider a 15-year fixed-rate mortgage. The rates for this type of loan are even lower, but the trade-off is that you will have higher monthly payments due to the accelerated schedule.

What about refinancing from one ARM to another ARM?

Refinancing doesn’t necessarily mean switching to a fixed rate mortgage – you can refinance your existing ARM to a new ARM.

Just because you can, doesn’t mean you should. In today’s low rate environment, you could be paying more with an ARM, so it’s imperative to compare current rates on ARMs and fixed rate options.

Current mortgage rates

The 30-year average fixed refinance rate is currently 3.300%, according to Bankrate’s national survey of mortgage lenders, and the 15-year average fixed refinance rate is 2.600%. For comparison, the average 5/1 ARM refinance rate is currently 3.980%.

It’s still one of the cheapest times in history to borrow money for a house, but it can’t go on forever. With the Federal Reserve signaling the potential for an interest rate hike as early as 2022, mortgage rates today could be the best you can find. In fact, Freddie Mac’s most recent economic outlook forecasts 30-year mortgage rates to hit 3.8% by the end of next year. So if you are thinking about refinancing, avoid the wait game. Even if you’ve already refinanced your mortgage, it may be worth doing it again.

When looking to refinance, it is important to look for a lender, even if you have established a relationship with the one you currently have. Compare the fees and terms to see how much you would actually save between different lenders. You can also consider consulting a mortgage broker. Some have relationships with specific lenders and may offer rates that you might not get directly from those lenders.

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