Can I refinance an ARM?
If you are feeling a bit uneasy about the unpredictable nature of your adjustable-rate mortgage (ARM), and you’re wondering whether it’s possible to refinance it, you’re in the right place.
In this article, we'll guide you through everything you need to know about ARM mortgage refinance. If you're eager to start exploring your options immediately, don’t wait—refinance with Rate today!
I Have an Adjustable-Rate Mortgage. Can I Refinance?
Yes, you can refinance an adjustable-rate mortgage (ARM), much like you would with a fixed-rate mortgage (FRM). A FRM is a loan where the interest rate remains constant for the loan term, which is usually 15 or 30 years. This provides predictable monthly payments, unlike an ARM, where rates and payments can fluctuate.
When you refinance, you’ll need to meet your lender’s requirements, which usually include:
- Having sufficient home equity: Home equity is the difference between your home’s market value and the remaining balance on your mortgage. It’s an important factor in qualifying for a refinance.
- A good credit score: A strong credit score and/or credit profile helps you qualify for lower interest rates, which can make a big difference in your monthly payments and the total amount you’ll pay over the life of the loan.
- A manageable debt-to-income ratio: This ratio compares your monthly debt payments to your monthly income and helps lenders assess your ability to manage new debt. A DTI under 43% is typically considered acceptable, though the lower your ratio, the better your chances are of getting approved with favorable terms.
Refinancing an ARM can offer some peace of mind by transitioning to a fixed-rate mortgage and locking in a consistent monthly payment that won’t increase unpredictably over time.
This is especially beneficial if you expect rising interest rates in the near future or if you’re planning to stay in your home for the long term.
Keep in mind that refinancing does come with costs, such as closing fees and potentially an appraisal, so it’s important to weigh these against the long-term savings you might achieve.
If you’re ready to explore your refinancing options, it might be the perfect time to take control of your mortgage with Rate.
When to Think About an ARM Refinance
Here are some key situations when you can refinance an ARM:
1. When Interest Rates Are Low or Have Decreased:
Refinancing at a lower interest rate than your initial ARM rate can reduce your monthly payments and the overall loan cost. You might qualify for even more favorable rates if your credit score has improved.
2. When You’re Approaching the End of the Initial Fixed-Rate Period:
ARMs offer an initial period with a fixed interest rate—for example 5 years in a 5/1 ARM—before the rate begins to adjust periodically.
As you near the end of this fixed-rate period, refinancing to a fixed-rate mortgage can help you avoid potential increases in your monthly payments, ensuring a consistent, predictable payment plan throughout the remainder of your loan term.
3. Change in Repayment Term:
Refinancing can also allow you to adjust the length of your loan. Depending on your financial goals, you could shorten your term to pay off your mortgage faster or extend it to reduce your monthly payments.
4. Eliminating Mortgage Insurance:
If you initially made a smaller down payment, and have now built up at least 20% equity in your home, refinancing can help you eliminate mortgage insurance, reducing your monthly payments and saving you money over time.
5. Accessing Home Equity:
For homeowners with a larger amount of equity, a cash-out refinance could be an attractive option. This type of refinance allows you to take out a larger loan than your current mortgage, providing you with the difference as cash.
This cash can be used for funding home improvements, consolidating debt, or other major expenses.
What Steps Should I Take If I’m Thinking About Refinancing?
Refinancing your adjustable-rate mortgage (ARM) can be a smart move if you're looking to lock in a stable rate or take advantage of lower interest rates.
But before jumping in, it’s important to understand the steps involved so you can make the best financial decision. Taking the time to evaluate your current loan and financial situation will help ensure the refinance process goes smoothly and works in your favor.
Here’s a step-by-step guide to help you navigate the refinancing process:
1. Review Your Current Loan:
Begin by thoroughly understanding the terms of your existing ARM, including the index, margin, and rate caps. Knowing when and how your interest rate will adjust can help you determine the urgency and potential benefits of refinancing.
2. Check Your Credit Score:
Your credit score plays a crucial role in determining the interest rates and loan terms you’ll qualify for when refinancing. A higher credit score can lead to lower interest rates, saving you money over the life of your new loan. You can pull your credit score for free from various sources, such as Experian, TransUnion and Equifax via AnnualCreditReport.com.
Strategies to Improve Your Credit Score Quickly*:
- Pay Down Credit Card Balances: Reducing your credit card balances to below 30% of your credit limit can improve your credit utilization ratio, which is a key factor in your credit score.
- Dispute Errors on Your Credit Report: Get a copy of your credit report from all three major credit bureaus (Experian, TransUnion, Equifax) and carefully review it for any errors. Dispute any inaccuracies that could be dragging down your score.
- Become an Authorized User: If possible, ask a family member with a strong credit history to add you as an authorized user on one of their credit accounts. This can help improve your credit score by leveraging their positive payment history.
- Pay Bills on Time: Ensure that all your bills are paid on time, as payment history is one of the most significant factors affecting your credit score. Even a single late payment can have a negative impact.
3. Calculate Your Target Loan Offer:
Before shopping for lenders, estimate what loan terms would make refinancing worthwhile for you.
Consider factors like:
- Your current mortgage balance: Your current mortgage balance is the amount you still owe on your home loan. Basically, it’s the total left after all the payments you’ve made so far.
- Interest rate: Your interest rate is the percentage your lender charges you to borrow money for your home. The lower the rate, the less you’ll end up paying overall for the loan.
- Remaining loan term: The remaining loan term is how much time you have left to pay off your mortgage. If you’ve got a 30-year loan and you’ve been paying for 10 years, you essentially have 20 years left to pay off the loan.
- Potential closing costs: These are fees you pay to complete the refinancing, which can include application fees, appraisal fees, and title insurance.
Online refinance calculators can be helpful tools for determining a target interest rate and loan term that align with your financial goals.
4. Lock In Your Interest Rate:
Interest rates can fluctuate between the time you submit your refinance application and when you close on your loan.
To protect yourself from potential rate increases, you can choose to lock in your interest rate when you apply. This ensures that you’ll get the agreed-upon rate, even if rates rise before your loan closes.
How Can You Refinance an ARM Loan?
You can complete our Digital Mortgage application, to understand your home affordability options and get pre-approved to start exploring your refinance opportunities.
The application process will involve providing detailed personal and financial information, including documentation such as:
- W-2s: Your W-2 is a form your employer gives you every year that shows how much you earned and how much was taken out for taxes. It’s what you use when filing your taxes to report your income.
- Tax returns: Your tax return is the form you file with the IRS each year to report your income, expenses, and taxes. It shows if you paid enough taxes or if you might get some money back.
- Bank statements: A bank statement is a record from your bank that shows all your account activity - like deposits, withdrawals, and your current balance. It’s a snapshot of your financial life for that month
- Pay stubs: Pay stubs are the slips you get with your paycheck that show how much you earned and how much was taken out for taxes and other deductions. They break down everything so you can see where your money went.
This information will be used to verify and check your credit score, assess your debt-to-income ratio, and determine your eligibility for the refinance. To make this process seamless for you, we offer top-of-the-line technology and expert customer service to guide you every step of the way. After your application is approved and all the necessary documentation is submitted, the final step is closing on your new mortgage.
During the closing, you’ll review and sign the loan agreement, pay any closing costs that haven’t been rolled into the loan, and officially transition from your old loan to the new one. The previous loan will be paid off, and you’ll begin making payments on the refinanced mortgage.
During this stage, it’s important to carefully review the loan offers. Pay close attention to the interest rates, repayment terms, and any additional costs such as closing fees. If you’re considering another ARM, make sure to understand the new loan’s rate adjustment schedule and caps.
Rate’s elite team of refinance experts will ensure that your transition is smooth, allowing you to start benefiting from your new mortgage terms right away!
ARM Refinance FAQs
1. How does refinancing an ARM affect taxes**?
Refinancing your ARM can have tax implications, particularly if you choose a cash-out refinance. The interest on the mortgage debt used to purchase or improve your home is typically tax-deductible, but the portion of the loan that exceeds the original mortgage balance and isn't used for home improvements may not be. Additionally, if you take cash out*** and use it for other expenses, such as paying off debt or funding a vacation, the interest on that portion may not be deductible. Consult with a tax advisor to understand the specific impacts on your situation.
2. What are the potential risks of refinancing from an ARM to a fixed-rate mortgage?
While refinancing from an ARM to a fixed-rate mortgage can provide stability, there are potential risks to consider. For instance, fixed-rate mortgages typically start with higher interest rates than ARMs during the initial period. If you’re not planning to stay in your home long-term, the higher initial payments might outweigh the benefits of refinancing. Additionally, the upfront costs of refinancing, including closing fees, can be significant. It’s crucial to evaluate whether the long-term benefits justify these initial expenses.
3. How long does the refinancing process take, and what can cause delays?
The refinancing process can take anywhere from 30 to 45 days, depending on various factors. Common delays include issues with property appraisal, incomplete or inaccurate documentation, or complications during the underwriting process. To avoid delays, ensure all paperwork is in order and respond promptly to any requests from your lender. Understanding the potential hurdles ahead of time can help you manage your expectations and stay prepared throughout the process.
4. Can I refinance if my home’s value has decreased?
Refinancing can be challenging if your home's value has decreased, especially if you owe more on your mortgage than the current market value of your home (known as being "underwater" on your mortgage). However, there are specific refinance programs available, such as the FHA Streamline Refinance or the VA Interest Rate Reduction Refinance Loan (IRRRL), which may allow refinancing even in these situations. These programs often have more lenient requirements and could be a viable option if your home has lost value.
5. What should I do if I’m unsure about the best time to refinance?
If you're unsure about the best time to refinance, consider monitoring interest rate trends and using mortgage calculators to estimate potential savings. It's also wise to consult with a mortgage advisor who can analyze your financial situation and provide personalized recommendations. Timing the market can be difficult, so it's essential to focus on your financial goals and whether the current rates and terms align with them.
Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the Nevada Department of Veterans Services, the US Department of Agriculture, or any other government agency. No compensation can be received for advising or assisting another person with a matter relating to veterans’ benefits except as authorized under Title 38 of the United States Code.
*If Applicant self-reports credit score as “needs improvement,” Rate, Inc. will not run credit or provide credit scores via the Digital Mortgage. Applicant may request credit scores by contacting Rate, Inc.
**Rate, Inc. does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.
***Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Rate, Inc. for more information