Can I refinance an ARM mortgage?

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Can I refinance an ARM mortgage?

Low mortgage rates induce many homeowners to refinance, and the vast majority of them opt for fixed-rate housing loans. Can I refinance an ARM mortgage?

How does a variable interest rate mortgage (ARM) work?

A floating rate mortgage is a mortgage for which the interest rate may change (ie Adjust) over time depending on “market conditions”.

Sometimes ARM mortgage rates adjust higher. Sometimes ARM mortgage rates adjust lower. And ARMs can be a great option for first time home buyers.

However, ARM interest rates change for homeowners who use them, ARM carries a financial risk that does not occur with fixed-rate loans. For example, when you use ARM to finance your home, there is no way to find out what your mortgage rate will be in 10 years.

Reasons for refinancing at a fixed rate

A variable rate mortgage has some pros and cons. Reasonable use can save you money for a limited time. But it can also bring a lot of financial uncertainty, especially after the first few years.

After reaching the first ARM loan adjustment period, the interest rate will start to change within a predetermined period of time (usually every year). Take, for example, a 5/1 ARM loan. It is a hybrid mortgage that starts with a fixed interest rate for the first five years. Then the interest rate will change every year.

Technically the rate can change, increasing or decreasing. But over time they usually increase. That is why most homeowners try to refinance an ARM loan with a fixed rate mortgage. Nobody wants to ride a roller coaster with variable rates.

Can I refinance an ARM mortgage?
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Qualification for ARM refinancing

Most lenders need 20 percent of capital for refinancing, although some allow 10 percent of capital for borrowers with excellent loans and income.

The problem is that if you have less than 20% equity you will have to pay private mortgage insurance (PMI), which will increase your monthly repayment. PMI companies also don’t like ARM, so they will probably charge higher PMI premiums if you choose ARM.

ARM borrowers will be eligible for loans based on an interest rate that is 2 percent higher than the initial rate.

When should ARM refinancing?

You can consider refinancing ARM when:

  • You are approaching the end of the initial bid block period. The initial bid lockout period is certain, but once the ARM begins to adjust, it may rise or fall. If you don’t want to ride the correction waves, you can refinance your ARM with a fixed interest rate mortgage.
  • Your financial situation has changed. Maybe you’re approaching retirement and your income will be fixed. If your budget no longer has flexibility, it makes sense to switch from ARM to a fixed rate mortgage.
  • Interest rates are rising. If your financial forecasts predict higher interest rates in the future, you may want to block a lower fixed interest rate.
  • You want a different loan period. Many ARMs are granted for 30 years, but if you do not want a mortgage for so long, you can refinance on a 15-year fixed-rate or other short-term mortgage.
  • Your adjustment was brutal. If your bid adjustment has left you with a budget that is lower than you can afford, it is worth looking for alternatives.
  • Your lender offers conversions. Some lenders allow you to switch from ARM to a fixed-rate loan without going through all the traditional refinancing hoops. If yours allows conversion, you may want to consider asking the lender about it.
  • Your ARM keeps you up at night. ARM is a great financial tool, but not for everyone. If the adjustable rate causes sleep loss, you can find peace by blocking a fixed rate.

 

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