Can You Refinance an Adjustable-Rate Mortgage?

Quick Answer

You can refinance an adjustable-rate mortgage (ARM). This allows you to buy a home with a lower starting rate, but refinance later when your rate climbs.

Family meeting with a mortgage professional outside their home.

You can refinance an adjustable-rate mortgage (ARM) just like you could with any other type of mortgage. The option to refinance could make an ARM appealing if you're looking to buy a home and want to start with the lower rate—and monthly payment—that ARMs can offer, but you're worried about future rate increases.

Refinancing is also an option if you have an ARM and want to lock in a fixed rate. However, closing costs and potential prepayment penalties could make it expensive to refinance an ARM.

Is It Possible to Refinance an Adjustable-Rate Mortgage?

Refinancing an ARM is similar to refinancing a fixed-rate mortgage. You'll need to qualify and apply for the new mortgage and then use the proceeds to pay off your ARM. You can also refinance with different types of new mortgages, such as a 20- or 30-year fixed-rate mortgage, or you could even refinance with a new ARM.

Refinancing ARMs can be especially appealing because the interest rate and monthly payment can increase once the rate changes start. For example, with a 5/1 ARM, the interest rate is fixed for five years and then adjusts once per year for the rest of the loan term. With a 7/6 ARM, it's fixed for seven years and then adjusts every six months.

Although ARMs may have caps on how much your interest rate can increase with each adjustment and overall, a rising rate could significantly increase your payment and how much interest accrues. Refinancing to a lower or fixed-rate loan can help.

However, there's no guarantee that you'll be able to sell your home for a good price or qualify to refinance before your ARM's rate starts to change. When considering an ARM, calculate the maximum possible monthly payment to understand how much you could wind up having to pay.

When to Consider Refinancing an ARM

Refinancing an ARM allows you to lock in a fixed rate or start with a new, lower-rate mortgage. You might want to consider refinancing an ARM if you:

  • Qualify for better rates: Even if mortgage rates have increased since you originally bought your home, you might now qualify for a lower rate if your credit scores increased or you can afford a larger down payment.
  • Want to switch to a fixed-rate loan: Refinancing with a fixed-rate mortgage can eliminate the risk of your interest rate and payment increasing.
  • Want to change your repayment term: Taking out a shorter- or longer-term loan can also affect your interest rate and monthly payment.
  • Want to get rid of mortgage insurance: If you now have at least 20% equity in the home, you might be able to get a new mortgage without mortgage insurance, which can lower your monthly payments and save you money.

There can also be other reasons to refinance a mortgage, such as after a divorce if you want to put the mortgage in one person's name. Or, depending on how much equity you've accumulated in your home, you may be able to use a cash-out refinance to get a larger loan and receive the difference between your old and new mortgage balances as cash.

How Much Does Refinancing an ARM Cost?

Refinancing can make financial sense and eliminate some of the risk of having an adjustable-rate loan, but there are also upfront costs to consider.

  • Closing costs: Similar to when you first get a mortgage, you'll have to pay closing costs for your new mortgage, which can range from about 2% to 5% of the loan's balance. Some mortgages advertise no closing costs, but they have higher interest rates or the costs get rolled into your loan amount.
  • Prepayment penalties: In addition to your closing costs, some ARMs have prepayment penalties, which could cost you thousands of dollars. But look over your loan's terms carefully as the prepayment penalty may only apply during the initial period.

How to Refinance an Adjustable-Rate Mortgage

Follow these six steps if you want to explore refinancing your adjustable-rate mortgage.

  1. Check your credit. Your credit scores can directly impact your eligibility for various types of mortgages and the interest rates you receive. You can check your FICO® Score 8 for free from Experian, but you may also need to pay to check the credit scores that mortgage lenders use.
  2. Calculate your target loan offer. Consider the potential closing costs and your mortgage's balance, interest rate, remaining term and prepayment penalties to determine what rates and terms you'd need to receive to make refinancing worthwhile. There might not be a specific answer because closing costs vary, and you don't know how your ARM's rate will change. But you can use various online calculators to help you find a target range.
  3. Get prequalified or preapproved. Start shopping for mortgages to see if you'll qualify for an offer in your target range. Prequalification can give you a rough idea of your options based on your basic financial information. Preapproval is a more rigorous process, similar to the actual loan application, that can give you more precise loan offers.
  4. Review the loan offers. Look over the prequalification or preapproval offers to see if refinancing makes sense. And closely look at the fine print, not just the interest rate and repayment term. For example, if you're refinancing with a new ARM, see if the lenders offer different interest rate caps or prepayment penalties.
  5. Submit the application. If you decide refinancing makes sense, complete the application with the lender that gives you the best offer. Closing on your new loan might take around four to six weeks, partially depending on whether you need an appraisal or inspection.
  6. Make it official. Sign your new loan agreement to complete the refinancing. Your new lender will then pay off your old loan, and you'll start making payments to your new loan servicer.

Monitor Your Credit if You're Thinking About Refinancing

Monitoring and improving your credit can be important when you want to refinance your mortgage. For instance, you might want to hold off on applying for other credit accounts to avoid lowering your score. And focus on paying down credit card balances to lower your credit utilization rate. You can also track your progress with free credit report and score monitoring from Experian, and log in to your account to get tips on improving your credit.