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Should I Refinance My Adjustable-Rate Mortgage?

Maurie Backman
By: Maurie Backman

Our Mortgages Expert

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There's a reason adjustable-rate mortgages (ARMs) are appealing. Often, they come with much lower interest rates than fixed loans. If you get a 5/1 ARM, for example, you might score an interest rate that's substantially lower than you'd get with a 30-year fixed loan. As such, you're guaranteed a lower monthly payment for at least five years.

But while ARMs make sense in some situations, based on what mortgage rates look like right now, you're better off getting a fixed loan. If you currently have an ARM, it could pay to refinance your mortgage to a fixed interest rate sooner rather than later.

The difficulties with adjustable-rate mortgages

An ARM only guarantees your initial interest rate for a certain period of time. In the case of a 5/1 ARM, you get five years with the rate you've locked in, after which your rate can adjust once a year -- either upward or downward, depending on market conditions.

Lower interest rate

An ARM makes a lot of sense when you're only planning to be in your home for a short period of time. Conceivably, you'll sell your place and pay off your mortgage before your rate has a chance to climb. It can also be a good move when you're able to snag a really great discount on your rate up front. But given you can get such an affordable interest rate on a fixed loan today, it makes sense to refinance out of your ARM.

Say you managed to lock in a 5/1 ARM at a little under 3% about five years ago. That's a competitive rate, and it's comparable to what you'll get for a 30-year mortgage today. But once your first five years on that loan are up, you run the risk of your rate increasing.

On the other hand, if you refinance to a fixed loan today, you could potentially lock in a rate at under 3% for the duration of your home loan.

Shorter term

Furthermore, the shorter the mortgage term you refinance to, the lower your interest rate is likely to be. If you can swing a higher monthly payment, you might consider a 15-year mortgage. And if that doesn't work, you can look into a 20-year mortgage. Some lenders will even give you a custom term so that if, for example, you've been paying a mortgage for three years, you can refinance to a 27-year loan. (Not all lenders offer custom loan products, though, so don't expect to see this across the board.)

Things to consider when refinancing an adjustable rate mortgage

To qualify for a mortgage refinance, you'll need to meet certain criteria, which include:

  • A strong credit score.
  • A reasonable debt-to-income ratio.
  • A stable job and earn enough to cover your mortgage payments.
  • A home that's worth enough money to cover the amount you're seeking to borrow. Home prices have risen universally across the county this past year, so this is less likely to be a problem than it normally would be.

To be clear, these requirements apply for any type of mortgage refinance -- not just borrowers who want to switch out of an ARM.

Another thing you should know is that some ARMs come with a mortgage prepayment penalty for paying your loan off early. If yours does, you'll need to take it into account before you refinance (because when you refinance, you pay off your existing loan and get a new one). Even so, it could still pay to swap an ARM for a fixed loan based on today's rates.

A fixed mortgage gives you get the stability of predictable monthly payments. And given today's economic climate, that's a good thing. While an ARM may have been attractive back when you signed it, at this point, it's hard to pass up the opportunity to lock in a low fixed mortgage rate for many years.

Still have questions?

Here are some other questions we've answered:

The Ascent's best mortgage refinance lenders

Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.

Our Mortgages Expert