Refinancing with an Adjustable-Rate Mortgage: A Complete Guide
Refinancing with an adjustable-rate mortgage (ARM) can help you consolidate debt, get cash back, change the terms of your loan, or make payments more manageable. We have your guide below.
What Is Adjustable-Rate Mortgage (ARM) Refinancing?
Offers an initial fixed-rate period
ARMs start with a fixed-rate period which typically lasts 5, 7, or 10 years. During this time, your interest rate stays the same.
Adjusts your interest rate based on market conditions
After the fixed-rate period ends, the interest rate can change periodically based on market conditions, up to the annual and lifetime rate caps.
Is ideal for short-term ownership
ARM refinancing is ideal if you plan to sell your home or refinance it again before the fixed-rate period ends. This means you can enjoy the upfront benefits without having to stick around for rate changes.
What Can Adjustable-Rate Mortgage Refinancing Be Used For?
Avoiding rate adjustments
ARMs come with the risk of periodic interest rate increases once the initial fixed-rate period ends. If your ARM is approaching the adjustment phase, refinancing can help you avoid rate hikes.
Switching to a fixed-rate mortgage
One of the most common reasons people refinance an ARM is to convert it into a fixed-rate mortgage. This provides consistent, predictable monthly payments that are easy to budget around.
Accessing your home equity
As you build equity in your home, refinancing allows you to tap into it for other purposes. This can fund major expenses like home renovations, emergency medical bills, or even a dream vacation.
Pros
- Attractive introductory interest rates
- Initial fixed-rate period of 5-10 years
- Annual caps on rate adjustments
- Option to refinance again later on
Cons
- Terms can be complicated
- Monthly payments may be difficult to predict
- Payments can increase when the fixed-rate period ends
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Alternatives to a Refinancing with an ARM
- Replaces your adjustable-rate mortgage (ARM) with a fixed-rate loan
- Locks in a consistent interest rate for the life of the mortgage
- Provides stable monthly payments, making it easier to budget
- Ideal for long-term homeowners
- Pay only interest during the initial period
- Offers flexibility for borrowers expecting higher future income
- Best for short-term homeowners and those planning to sell before principal payments begin
- VA refinancing offers fixed-rate stability to eligible veterans, service members, and surviving spouses
- FHA Streamline refinancing provides a simplified option for adjustable-rate mortgages backed by the FHA
- USDA refinancing can help rural homeowners with ARMs switch to a mortgage with predictable payments
How Do I Know If Adjustable-Rate Refinancing Is Right for Me?
You need manageable initial payments
Adjustable-rate refinancing offers attractive initial payments. If your priority is affordability now, ARM refinancing could be a practical solution.
You plan to sell or refinance again before the rate adjusts
Since ARMs have a fixed-rate interest period at the start of the loan, they're often used by borrowers who know they will sell or refinance before this period ends.
You expect your future income to be higher
Refinancing with an ARM can also make sense if you expect an income increase. Manageable starting payments can offer breathing room while waiting for your financial situation to improve.
When Is the Best Time to Use Adjustable-Rate Mortgage Refinancing?
The best time to use adjustable-rate mortgage (ARM) refinancing is when you stand to benefit the most from having an affordable payment in the short term.
For example, say you just graduated college and are buying a house in the city where you will start your career. An ARM can give you manageable payments for the first few years of your loan and protect you from interest rate changes until you’re well-established.
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FAQ
Can I use adjustable-rate mortgage refinancing if I plan to sell my home soon?
If you’re considering selling your home in the near future, refinancing to an adjustable-rate mortgage (ARM) can offer attractive interest rates for the short-term. This makes payments more manageable, and by the time the rate is set to adjust, you may have already sold your home and paid off the loan. However, you’ll need to check to make sure closing costs and any prepayment penalties don’t outweigh the potential benefits in your specific situation.
Do I need a certain loan-to-value ratio to qualify for ARM refinancing?
Just like with other mortgage programs, refinancing with an ARM does require borrowers to meet a specific loan-to-value (LTV) threshold. Usually, this is at least 20% equity (or an 80% LTV) to obtain favorable interest rates and avoid private mortgage insurance (PMI). Some programs may allow higher LTVs and your NYFTY Lending expert can help you choose the right mortgage to fit your needs.
What documentation do I need to refinance with an ARM?
Will refinancing to an ARM help me pay down my principal faster?
Refinancing your loan to an ARM may help you pay down your principal faster if you put what you save back into your mortgage. This reduces your outstanding balance and gives you the opportunity to significantly lower your principal before the introductory period ends.
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