When Should You Refinance an Adjustable-Rate Mortgage?

Climbing mortgage rates have renewed interest in adjustable-rate loans. These mortgages made up 12.8% of originations in October 2022, according to the Mortgage Bankers Association, after hovering at 3% for much of 2020 and 2021. They made up 6.3% of originations as of July 2023.

While this type of mortgage can be appealing to homebuyers hoping to save some money upfront, it can cost more in the long run if you’re not careful.

If you have an ARM or you’re thinking about getting one, you may want to consider refinancing it into a fixed-rate mortgage. Here’s why and when to think about doing it.

Why Are ARMs Attractive?

Favorable short-term introductory rates can make ARMs an attractive option for some homebuyers.

With a fixed-rate mortgageyour interest rate remains the same for the life of your loan. This predictability and simplicity make it the more popular type of mortgage by far.

With an ARM, your interest rate remains fixed for a certain period – typically three, five or 10 years – after which it switches to a variable rate that adjusts every six or 12 months. These are called hybrid ARMs. There are also other types of ARMs, such as interest-only and payment-option ARMs.

What all ARMs have in common is an initial fixed-rate period and then a longer adjustable-rate period. That arrangement shifts the risk of rising interest rates from the lender to the borrower. But for some homeowners, that risk is worth it for a few reasons:

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Lower Upfront Interest Rates

ARMs start with lower interest rates than fixed-rate mortgages.

The average rate on July 21, 2023, for a 5/1 ARM – a loan with a five-year fixed period and then a rate that adjusts annually – was 6.23%. Meanwhile, the 30-year fixed-rate mortgage average was 7.31%.

“ARMs are a great mortgage product in a rising rate environment,” says Deb Klein, branch manager at Reliability in Lending at Primary Residential Mortgage. “It creates the ability for families and individuals to afford the homes and neighborhoods they want to live in without greatly impacting the quality of life and style of living they are accustomed to.”

Qualification Is Easier

ARMs are generally easier to qualify for than fixed-rate loans because the interest rates and the monthly payments are lower.


If you’re not certain about your future, the fixed period on an ARM may be short enough to give you the flexibility you need. For example, a lot can happen in five years. If you choose to move or if interest rates go down, you can enjoy the lower rate and monthly payments and still have the option to refinance or sell before the less predictable adjustable-rate period begins. This is especially true if you plan to stay in the home for less time than the fixed period of the loan.

Can You Refinance an ARM to a Fixed Mortgage?

ARMs may be appealing upfront, but “the glitz of lower payments can suddenly lose its glamour after the grace period ends and a new period of higher payments begins,” says Jodi Hall, president of Nationwide Mortgage Bankers.

Homeowners can refinance their ARM to a fixed-rate mortgage at any time. In the right scenario, you could secure an interest rate that’s about the same or even lower than what you’re currently paying.

Refinancing into a fixed-rate mortgage “provides stability in the form of fixed expenses, which allows individuals to feel more secure with changes in personal planning, such as retirement,” Klein says.

Even if your new rate is slightly higher, refinancing into a fixed-rate mortgage will be less risky in the long run. But depending on the situation, there are some potential downsides to consider:

Closing Costs

Every time you take out a mortgage, whether it’s a purchase loan or a refinance loan, you’ll need to pay closing costs. Those can amount to 2% to 6% of the loan amount.

In many cases, you can either pay those costs upfront or roll them into the new loan.

Rolling them into the new loan may sound like a good idea, especially if you don’t have a lot of cash on hand. But over 30 years, $10,000 in closing costs with a 5% interest rate will end up costing you $19,326.

Interest Rate Risk

While you may have gotten an ARM with the plan to refinance before your fixed period is up, an ARM refinance may increase your costs if interest rates have jumped since you took out the loan.

If rates have gone up drastically, it could even make your new loan unaffordable, at which point you may feel forced to hold onto the ARM.

The silver lining in this scenario is that lenders limit how much they can hike an interest rate during each adjustment period and overall. That means you may not immediately have to pay the current market rate.

Still, it gives you less flexibility and can make you feel helpless about your situation.

Prepayment Penalty

Some ARMs may come with a prepayment penalty that kicks in if you refinance your loan or sell your home within three to five years. The penalty may be a fixed amount – such as six months’ worth of interest – or a percentage of your principal balance.

This fee, which can cost thousands of dollars, will be in addition to your closing costs on the new loan.

If you’re planning on applying for an ARM, watch out for such a penalty. And if you’re thinking about refinancing, review your loan agreement for it.

When Is the Right Time to Refinance an Adjustable-Rate Mortgage?

As with any major financial decision, consider both the benefits and the drawbacks. With that in mind, here are some situations where it might make sense to refinance your ARM:

  • Your credit score is in good shape. If your credit score is as good as or better than when you took out the loan, you’ll have a better chance of getting a comparable or even lower interest rate than what you’re paying now. And in a rising-interest-rate environment with little possibility of lowering your rate, it can still help you maximize your savings on the new loan.
  • You’re planning on staying in the home for a long time. If you’re nearing the end of your fixed period and you’re only planning on staying in the home for one or two years, the refinance closing costs may outweigh the increase in your monthly payment if your rate adjusts upward. But if you’re not planning on moving within the next few years, it may be worth it to lock in a fixed interest rate, especially if economic conditions appear murky.
  • You can afford the closing costs. It’s generally better to pay closing costs out of pocket than to roll them into the new loan. If you can afford that without putting your emergency fund at risk, and you plan on staying in the home for several years, it may be worth it.
  • You have other financial goals. If you’re considering a cash-out refinance to consolidate debt, pay for home renovations or achieve other financial goals, switching to a fixed interest rate at the same time allows you to accomplish two goals at once.
  • Interest rates are expected to increase dramatically. If interest rates are already on the riseyou may want to lock in a fixed rate earlier rather than later. That’s the case even if you’re not nearing the end of your fixed period. Do some research on the direction interest rates are going and what experts are saying about their trajectory to decide.
  • You’re ready for more security. Even if interest rates are increasing, the future of the market is unpredictable. “If rates fall in the future, you will have refinanced for nothing,” says Hall, “but if they rise, you may have saved yourself tens of thousands of dollars.” If you’d rather have the predictability of a fixed monthly payment instead of the potential for a lower payment in the future, refinancing can give you that peace of mind.

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