How to Refinance Your ARM Into a Fixed-Rate Mortgage

Did you know the two most common reasons people refinance their mortgage loans is to (A) get a lower interest rate and/or (B) switch from an ARM loan into a fixed-rate mortgage? It's true. And in certain cases, you can accomplish both of these goals at the same time. The question many homeowners have is — how do I do it? In this article, I'll explain how to refinance an ARM into a fixed-rate loan, and why it's usually a good idea to do so.

Reasons to Refinance to a Fixed-Rate

The adjustable-rate mortgage (ARM) loan has certain pros and cons. When used wisely, it could save you money for a certain period of time. But it can also bring a lot of financial uncertainty with it, especially after the first few years.

Once you reach the first adjustment period of an ARM loan, the interest rate will start changing at a predetermined interval (usually every year). Take the 5/1 ARM loan for example. This is a hybrid mortgage that starts off with a fixed rate for the first five years. After that, the interest rate will change every year.

Technically, the rate could change by either increasing or decreasing. But they usually adjust upward over time. This is why most homeowners try to refinance out of the ARM loan and into a fixed-rate mortgage. Nobody wants to ride a roller coaster of fluctuating rates.

It boils down to this. The adjustable mortgage is not a good idea when you plan to say in a home for many years. In such cases, the fixed-rate mortgage loan is usually a better option. And that's why a lot of people refinance away from their ARM loans and into the stability of a fixed rate. If you can do this and secure a lower interest rate at the same time, even better!

With a fixed-rate mortgage, you have the comfort of knowing your rate will never change, regardless of how long your keep the house and the mortgage loan.

Refinancing Away from the ARM Loan

So you've decided to say goodbye to your ARM loan and move into the stability of a fixed-rate mortgage instead. How do you get started? In essence, the process is a lot like the one you went through when you first bought the home. Only this time, you'll be applying for a loan as a homeowner instead of a buyer.

During this process, you will replace your original mortgage with an entirely new one. So the new loan has to be large enough to pay off your existing loan balance.

Here are the basic steps you'll go through when refinancing out of your adjustable-rate loan:

  • Do some initial research to find out how much equity you have in your home. You'll need to know the current balance of your mortgage, as well as the value of your home in the current market.
  • You can get your current loan balance from your lender, or whoever is servicing your mortgage loan right now. You can get an idea of your home's current value by looking at comparable sales in your area (or by hiring an appraiser).
  • It might be best to get a ballpark estimate of your home value online, and for free. Having the property appraised will cost you a few hundred dollars. And besides, the lender is going to send an appraiser out later on, after you apply for refinancing.
  • The amount of equity needed to refinance will vary from one lender to the next. For a standard refi (where you're not trying to pull any extra cash out of the home), most lenders require 5 - 10 percent equity. But these numbers are not set in stone.
  • Once you've determined that you have some equity in your home (and that your not upside down in the mortgage), you can begin to gather refinance quotes from lenders. I recommend getting online quotes from reputable websites like LendingTree, or from a lender you know and trust.
  • You might have an easier time getting approved if you refinance through your current lender, or the one you used when you first purchased the home. If you met their underwriting guidelines the first time around (and nothing significant has changed since then), you'll probably meet their guidelines this time around too.
  • Check your FICO credit score to see where you stand. If you want to refinance from an ARM loan into a fixed-rate mortgage, you'll have to meet the lender's minimum cutoff for FICO credit scores. A higher score will also help you qualify for a lower rate on the new loan. Learn more
  • When you request quotes from lenders, be sure to specify that you want a fixed-rate loan. Remember, that's the whole point of this tutorial, to refinance your ARM loan into a fixed mortgage.
  • When you get offers from lenders, you need to do the math to see if refinancing makes sense. You want to ensure that the money you save with the new loan is greater than the closing costs to get the loan. This article will help you run the numbers.
  • If you've determined that the refinance makes sense, and if you get approved for the loan, your chosen lender will then schedule your closing date. They will also work with your current lender about paying off the old mortgage.

Where to go next: This article explains the basics of refinancing into a fixed-rate mortgage loan. If you're ready to take the next step and get some quotes from lenders, you do so on this page.

Lesson summary: An adjustable-rate mortgage loan can help you secure a lower interest rate. Most ARM loans in use today are "hybrid" ARMs, which means they start off with a fixed rate for a certain period of time. Most homeowners who use this strategy will try to refinance into a fixed-rate mortgage before the initial period expires.

But there is no guarantee you'll be able to refinance. This is the biggest risk of using an ARM. You'll need to have a certain amount of equity in the home (usually 5 - 10 percent at a minimum). You'll also need a good credit score and sufficient funds to cover your closing costs.

If you'd like to learn more about this topic, you can use the search box provided at the top of this page. I've also sprinkled some hyperlinks throughout this lesson that will take you to related articles. Good luck!