Should You Refinance Your Adjustable-Rate Mortgage Into a Fixed Loan?
For many homeowners with adjustable-rate mortgages (ARMs), the clock is ticking. Once the introductory fixed period ends, interest rates can reset higher, often leading to bigger monthly payments. With that in mind, now might be the time to consider whether refinancing into a fixed-rate mortgage makes sense.
Refinancing an ARM: What It Means
When you refinance, you replace your current mortgage with a new loan. This could be another ARM or a fixed-rate mortgage. A fixed-rate loan locks in the same interest rate for the entire term — often 15 or 30 years — giving you predictable payments month after month. For borrowers worried about rising rates on their ARM, refinancing into a fixed-rate loan can provide peace of mind.
It’s worth remembering that refinancing isn’t free. Closing costs usually run into the thousands, so homeowners should calculate their “break-even point” — the point where the monthly savings outweigh the upfront costs. Shopping around with multiple lenders is also critical to ensure you’re getting the most competitive deal.
Steps in the Refinance Process
Refinancing an ARM follows the same basic path as refinancing any mortgage:
- Gather quotes from several lenders.
- Choose the best offer and complete the application.
- Undergo an appraisal and the underwriting process.
- Close on the loan and pay the associated fees.
Because you already own the home, the process is generally simpler than when you purchased the property, though financial documentation and appraisal requirements remain.
Basic Requirements to Qualify
Eligibility can vary by lender, but most refinance loans share similar standards. Typically, borrowers need a credit score of at least 620, a debt-to-income ratio under 50%, and at least 20% equity in their property. In most cases, you’ll also need to have made at least six months of payments on your current mortgage.
Costs to Factor In
While refinancing is usually cheaper than taking out an original purchase loan, the expenses can still be significant. Expect fees for origination, appraisal, and title services, though you’ll likely skip costs like a home inspection. Closing costs typically amount to 2% to 6% of the loan balance, so it’s important to budget accordingly.
Why Homeowners Refinance Into a Fixed Rate
Switching to a fixed-rate mortgage has several advantages:
- Predictable payments: Your monthly principal and interest stay the same for the life of the loan.
- Easier budgeting: Fixed housing costs make long-term financial planning more straightforward.
- Flexibility: Beyond the traditional 30-year option, you could choose a 15-year fixed loan with lower rates but higher monthly payments.
As Greg McBride, chief financial analyst at Bankrate, notes, “The appeal of fixed-rate loans is the stability they provide, particularly if your ARM is about to reset.”
The Potential Downsides
- There are also trade-offs to consider:
- Closing costs may reduce your short-term savings.
- If rates fall after you refinance, you won’t benefit from the drop.
- Extending the length of your loan could result in paying more in total interest over time.
Deciding Whether It’s Right for You
The decision to refinance depends on your personal financial situation. Consider your credit score, your long-term housing plans, and how close you are to the end of your ARM’s introductory rate. If you plan to sell soon or your ARM is still offering a competitive rate, refinancing may not be worth it. But if a sharp payment increase is looming, locking into a fixed rate could provide stability — and peace of mind.