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Should You Refinance Your ARM?

Written by Ashley Sutphin Posted On Tuesday, 28 June 2022 00:00

An ARM is an adjustable-rate mortgage. If you’re getting close to the end of the initial term, you might be thinking about refinancing and moving to a fixed rate.

Mortgage rates have gone up significantly from 2021, which had record-low rates, but even so, it could be a potentially good time to move to a fixed-rate primarily for the stability it can bring.

It’s a time when many homeowners are ready to eliminate the uncertainty of their adjustable-rate mortgage and have more certainty in a fixed-rate mortgage. This becomes even more appealing if more interest rate hikes are coming, which is very likely.

Refinancing An ARM

You can refinance an ARM, and as with any other refi, you’re replacing your current loan with a new one. You will go through pre-approval and underwriting all over again. You might work with your current lender, but you can also find a new one.

You’ll go through the appraisal process as well, which is when the value of your home is determined.

After the paperwork is completed, you pay for the closing costs, and then you get a new mortgage with different terms.

Refinancing To a Fixed-Rate Mortgage

If the current rates are lower than what you’re paying, you should strongly consider refinancing your adjustable-rate mortgage if you’re getting close to the initial term.

At the same time, you need to consider some factors.

 First, how much could you end up paying when your ARM resets? You need to understand both the annual and lifetime caps on your ARM.

The annual cap lets you know how much your rate could go up when it resets, while the lifetime cap is the maximum allowed amount for your loan duration.

Suppose you’re paying off an interest-only ARM during an introductory period. In that case, your payments will go up significantly when you pay down your actual loan, which can make moving to a fixed-rate option a good idea.

Fixed-rate loans have upsides. For example, your payments are always the same, and you have the peace of mind that comes with predictability and not worrying about how the market might affect your payments. As the Fed is aggressively pursuing rate hikes to cool inflation, this is a big upside of a fixed-rate mortgage.

You can plan for stability in your housing payment when you have a fixed-rate loan, and budgeting becomes easier.

Is It a Good Time to Consider Refinancing An ARM?

Mortgage rates are still relatively low but are increasing, so you might want to consider a refi before they go up anymore.

You have to think about your financial situation just like you would if you were getting an entirely new home loan. For example, what’s your credit score? What are your long-term plans, and will you be able to reach the break-even point on your closing costs? Can you afford the closing costs?

You’re not automatically going to save money just because you refinance. You need a good credit score to qualify for the best rates.

Finally, if you plan to stay in your home for the foreseeable future, refinancing and moving to a fixed-rate mortgage can be good. If you’re even considering a move in the short term, it’s usually not worth the costs to go through a refi. In this situation, even three or four years is considered short-term when you’re balancing the financial pros and cons of refinancing.

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