3 Tips for Refinancing an Adjustable-Rate Mortgage

Both new and experienced homeowners face the difficult choice of deciding which mortgage to choose. While many choose a traditional fixed-rate mortgage, the cost-saving benefits of an adjustable-rate mortgage (ARM) are at times much more beneficial to homebuyers. 

Understandably, an increasing number of mortgage applicants choose an adjustable-rate mortgage (ARM) as their financing option. However, the benefits only make sense in a few scenarios. 

If you’re one of the many homeowners nearing the loan anniversary date when rates reset, then keep reading. This article covers three tips for refinancing an adjustable-rate mortgage to your advantage. 

1. Refinancing an Adjustable-Rate Mortgage to a Lower Rate ARM

Refinancing is an important financial decision that shouldn’t be taken haphazardly. But when rates are near historical lows and if it’s near the time your loan term changes, it makes perfect sense to consider refinancing an ARM. 

As you might already know, most ARMs offered by lenders in the U.S. determine their interest rates on current U.S. Treasury rates. Of course, this can vary from lender to lender, and the only way to know for sure is to confirm it with each company. 

Let’s assume that you currently hold the most popular hybrid ARM, the 5/1 ARM. When the current U.S. Treasury rates are as low as they are, it’s safe to believe they’ll increase after the initial five-year period is over. So why consider refinancing your current ARM to another? One reason is if you find that lenders are offering ARM rates that are lower than what you’re currently paying. 

This ties into the next reason in the article to consider refinancing your current ARM – relocation. If you plan on relocating before your initial period comes to an end, then it makes sense to refinance and make lower monthly payments now to help build up your savings. 

You can use the cash you save as a down payment on your next home or make additional payments on the loan to build equity for when you need it. The nature of how an ARM works comes with a certain degree of unease and uncertainty. One of those is the potential for an increase in house payments. 

But the idea of refinancing to a lower rate ARM comes full circle here. You stand to gain if you plan on moving and by qualifying for lower monthly payments. The fact that the loan term resets back to a full 30 years isn’t a matter of concern in this scenario. 

2. Consider the Potential for Relocation

Many households grossly overestimate the length of time they’ll spend in one home before moving, leading to the decision to take on a fixed-rate loan instead of an ARM.

Meaning they unnecessarily pay extra on housing in return for the comfort of consistent payments. But as stated earlier, if you plan on relocating before the initial period ends, it’s favorable to put your cash towards another goal. 

If your plans on moving hit a bump in the road but are still intact, then it’s advantageous to refinance to an ARM with a longer initial period. Most lenders offer extended initial period ARM loans, like the 10/1 ARM, which have a minimal interest rate difference with a fixed-rate loan.

By refinancing to one of these ARMs, you’re able to enjoy the comfort of lower monthly payments and moving when the time is right for you. 

3. Refinancing to a Fixed-Rate Loan

While no single person can predict the direction rates will go, it makes sense to refinance to a fixed-rate when they’re at historic lows. 

The most common reason, and the most significant benefit, behind people choosing fixed-rate loans, is its stability. The main drawback with ARMs is concerns with the monthly payments fluctuating. But by having the same interest rate and principal throughout the life of the loan, you get the comfort of having a predictable monthly budget. 

During these uncertain times when financial adjustments can occur in the blink of an eye, it’s tempting to trade in uncertainty for a fixed-rate loan. It’s especially true if you decide to make your current home permanent. 

However, you must consider the higher interest rates that come with fixed-rate loans. In the initial three to seven-year period, fixed-rate loans typically come with higher interest rates than ARMs. 

A situation you want to avoid is increasing your housing payments while your income doesn’t see much change. This can set you back further than the alternative of refinancing to a longer initial period ARM. 

On top of increased payments, though slight, you’ll also be held responsible for any closing costs. But you can potentially negotiate the costs with companies offering legitimate mortgage refinance.

Refinancing to a fixed-rate loan is the smarter decision when you find yourself in the following circumstances:

  • You come across a lower rate than your current ARM rate
  • You’re nearing the end of the initial ARM term
  • Increased household income
  • No plans to relocate soon

Considering that the current 30-year fixed-rates are almost as low as the ARM rates from five years ago, refinancing makes perfect sense if you fall into the circumstances above. 

The Next Five Years

Refinancing an adjustable-rate mortgage comes with various considerations. Before settling on one mortgage over another, carefully think of your current financial situation. 

How will it change over the next five years? Are you expecting to relocate? 

Are you prepared for any significant changes like a potential increase in ARM rates when they reset? What are your goals for the upcoming five years? 

Take a few days to mull over these questions, so you’re aptly armed with research when you shop around for rates. Get in contact with one of our specialists to answer any inquiries and help tailor a solution specific to your needs. 

Over the past decade, Chad has played a significant role in the launch of 3 major sites for one of the nation’s largest direct lenders. His expertise in the mortgage industry comes with a heavy emphasis on call center management and analytics. With a passion for early-stage development, he will help to build the foundation of EnTrust Funding as we expand our reach within the industry. Chad and his family are excited to return to his hometown of Denver after spending time in Phoenix, Dallas, and Detroit.

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