Can You Refinance an ARM to a Fixed-Rate Mortgage?

The Pros and Cons of Refinancing Adjustable-Rate Mortgages

Yes. You can refinance from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage when you qualify for a new loan. Homeowners often think about refinancing their adjustable-rate mortgages when interest rates go down or when the interest rate on their adjustable-rate mortgage is ready to reset.

What Are the Differences Between an Adjustable-Rate and a Fixed-Rate Mortgage?

An adjustable-rate mortgage is a mortgage where the interest rate varies throughout the life of the loan. One popular adjustable-rate mortgage is a 5/1 ARM, which means the interest rate stays the same for the first five years of the loan and afterwards may adjust once a year. With a fixed-rate mortgage, the interest rate stays the same throughout the life of the loan.

What Are the Advantages of Refinancing from an ARM to a Fixed-Rate Mortgage?

Many homeowners refinance their ARMs because they want to make their payments more predictable. With an ARM, the amount of interest you pay each month can change over the life of the loan. With a fixed rate, the amount you pay in interest will always stay the same. Many homeowners value the peace of mind that comes with knowing their mortgage interest payments won't change.

Keep in mind your payment usually includes escrow payments for your property taxes, homeowners insurance, and mortgage insurance if your loan requires it. Your escrow payments can change whether you have an adjustable-rate or a fixed-rate mortgage, which can affect your total monthly payment too.

Does Refinancing from an ARM to a Fixed-Rate Mortgage Save Money?

It’s hard to predict if refinancing your ARM will save you money because it is hard to predict how the interest rate on your mortgage might adjust in the future.

The interest rates on ARMs adjust based on changes to a benchmark interest rate called an index. Common indexes used for adjustable-rate mortgages include the U.S. prime rate and the Constant Maturity Treasury (CMT) rate.

Refinancing might save you money if the index’s benchmark interest rate rises after you switch from an adjustable-rate to a fixed-rate mortgage. That’s because your ARM will often adjust to a higher rate, and increase your monthly interest payments, when the index rate increases.

On the other hand, refinancing might cost you money if the index’s benchmark interest rate decreases after you switch from an adjustable-rate to a fixed-rate mortgage. That’s because your ARM will often adjust to a lower rate, and decrease your monthly interest payments, when the index rate decreases.

For example, pretend you refinance from an adjustable-rate mortgage to a fixed-rate mortgage with an interest rate of 5%. If the index’s benchmark interest rate rises later, your old ARM’s interest rate might adjust to 6%. In this case, refinancing might help you save money.

If the index’s benchmark interest rate falls later, your old ARM’s interest rate might adjust to 4%. In this case, refinancing might cost you money.

It is also possible that rates won’t change after you refinance. For example, if you had an adjustable-rate mortgage with a 5% interest rate and the index rate does not change, then your interest payment may have stayed the same.

Also remember you will probably pay closing costs to refinance. These costs will affect whether refinancing saves you money, especially when future benchmark interest rates hold steady or decrease.

Can You Refinance an ARM to Another ARM?

Yes, you can refinance an adjustable-rate mortgage with a new adjustable-rate mortgage. You'll want to compare the rate, terms, and costs of a new ARM against your existing ARM and decide if refinancing makes sense for you.

Last reviewed and updated May 2024 by Freedom Mortgage.