If you currently have an ARM loan, you might wonder if you should refinance into a fixed-rate loan so you don’t have to worry about the rates changing.
Unfortunately, it’s not a one-size-fits-all answer. You must determine what factors play a role in your decision. For example, with interest rates continually increasing, you may want to decide if you should refinance and, if so, may want to do so soon.
Can you Refinance an Adjustable-Rate Loan?
The short answer to can you refinance an adjustable-rate loan is ‘yes.’ The longer answer is that it depends on your qualifying factors.
There isn’t anything preventing you from refinancing an ARM. For example, there usually isn’t a prepayment penalty, nor do you have to keep the loan for a certain amount of time. Like any mortgage, you can refinance an ARM when you qualify.
The bigger question is, should you refinance?
How to Decide if you Should Refinance your ARM into a Fixed-Rate Loan
Because each homeowner has different circumstances, it’s important to know how to decide if you should refinance into a fixed-rate loan.
Here are some questions to ask yourself.
Am I Staying in this Home for a While?
First, decide how long you plan to stay in the home. If you’re thinking about moving soon, refinancing doesn’t make sense. You’ll pay closing costs when you refinance. If you stay in the home, you can recoup the costs with the savings you incur without an adjustable rate. If you move before you recoup the costs, you’re better off keeping the ARM.
So how do you decide?
Figure out how much you’ll save if you refinance. The monthly savings are the difference between your current and new payments. If your rate hasn’t adjusted yet, figure out what it might adjust to using today’s terms and calculate the savings.
Next, determine the total closing costs. You pay these costs to close the loan, including underwriting, processing, appraisal, and escrow fees.
Divide the closing costs by your monthly savings; the result is the number of months it would take to break even.
For example, if a new loan would save you $125 a month, and you pay $3,000 in closing costs, it would take 24 months or two years to break even.
Refinancing doesn’t make sense if you don’t plan on staying in the home for much longer than the break-even period.
Do I Have a High Enough Credit Score to Qualify?
Next, determine if you have the credit to qualify to refinance. You might find options to refinance with any credit score, but it might not make financial sense.
The higher your credit score, the better rate, and terms lenders can offer. Ideally, you should have credit scores around 700+, but you can find decent rates with credit scores of 660 or higher too.
If you don’t have good enough credit, consider taking the time to fix it before trying to refinance your home.
Do I Need Payment Stability?
Before you refinance your ARM to a fixed-rate mortgage, ask yourself if you need payment stability. Does the risk of a varying interest rate make it difficult for you to budget or even afford the loan?
Some homeowners do better with a fixed payment they can expect each month without any unpleasant surprises. However, others don’t mind taking the variable rate risk if it means they’ll pay lower rates for certain months, mostly during the initial fixed-rate period of their loan.
The Advantages of a Fixed-Rate Loan
When you wonder if should you refinance your ARM into a fixed-rate mortgage, you should consider the advantages of a fixed-rate loan.
- Predictable payments – You don’t have to worry about your payment fluctuating with a fixed-rate loan. Your principal and interest payments remain the same for the entire term. If they adjust, the only part of your payment that could change is your real estate taxes or homeowner’s insurance.
- Easier to pay the mortgage off early – If you plan to pay your mortgage off early, a fixed-rate mortgage is easier to make it happen. You know your required monthly payment and can budget extra payments without worrying about increasing interest rates.
- Easier to save for other goals – Saving for other goals can be hard when you can’t budget for a steady mortgage. However, a fixed-rate loan has a constant payment, so you always know how much money you have available for other investments, such as retirement savings.
Alternatives to Refinancing an ARM
You aren’t required to refinance your arm into a fixed-rate mortgage. You can also refinance into another ARM.
This may sound odd if you’re trying to get rid of an ARM, but taking on a new ARM resets the fixed-rate period. Say, for example, you refinance into a 5-year ARM. You’ll have a fixed rate for another five years.
Keep in mind that this resets your amortization and could add time to your loan. Since ARM loans have 30-year terms, you’re starting over again. Say, for example, you paid on your current loan for five years and then refinanced into another 30-year term. You’ll add five years to how long it takes to pay your loan in full.
But, you always have the option to pay your loan off early. If you make extra monthly, annual, or lump sum payments, you can pay your loan off and save thousands in interest.
So should you refinance your ARM into a fixed-rate mortgage? It depends on your circumstances. Some borrowers benefit from refinancing, but others are better off keeping their ARM. Look at the big picture and decide which makes the most financial sense for you.
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