Can You Refinance an ARM Loan- An in Depth Guide

Can You Refinance an ARM Loan? An In-Depth Guide? An adjustable-rate mortgage (ARM) loan can be a great option for those looking for a lower initial interest rate. However, as the interest rate adjusts, it can burden homeowners. This is where refinancing comes into play. Refinancing allows homeowners to get a new mortgage with more favorable terms, including a lower interest rate, monthly payment, or both. But can you refinance an ARM loan? Let’s take a closer look.

Understanding ARM Loans

Interest rates on adjustable-rate mortgages (ARMs) are subject to vary after an initial fixed period. In the near run, homeowners may save more money with a variable-rate mortgage since the interest rate is lower than with a fixed-rate mortgage. A lender may establish a margin, or a percentage above or below the index, which might be the interest rate on Treasury Bills or the London Interbank Offered Rate (LIBOR).The total of the index plus the margin will be the new interest rate.

Types of ARM Loans

There are several ARM loans, each with its terms and conditions. Some of the most common types of ARM loans include:

  • 3/1 ARM: This type of loan has a fixed interest rate for the first three years, after which the rate adjusts annually.
  • 5/1 ARM: Similar to the 3/1 ARM, this loan has a fixed rate for the first five years and then adjusts annually.
  • 7/1 ARM: The fixed rate lasts for the first seven years, after which the rate adjusts annually.
  • 10/1 ARM: This loan has a fixed rate for the first ten years, after which the rate adjusts annually.

Benefits of Refinancing an ARM Loan

Homeowners may decide to refinance their adjustable-rate mortgage for a variety of reasons, including:

  • Reduced Monthly Payment: If you refinance your mortgage to a loan with a lower interest rate, you may be able to reduce your monthly payment, which frees up money that can be used for other costs or investments.
  • Shorter Loan Term: When refinancing, it’s often possible to reduce the loan’s duration and hence the interest rate and monthly payment.
  • Fixed Interest Rate: If you are uncomfortable with the uncertainty of an adjustable interest rate, refinancing to a fixed-rate mortgage can provide peace of mind.
  • Cash-Out Refinance: You may use the equity you’ve built up in your house to refinance and get a cash out loan for things like renovations, debt repayment, or anything else you need it for.

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When to Refinance an ARM Loan

When the Adjustable Period is Over: If you have an ARM loan about to adjust, refinancing to a fixed-rate mortgage can lock in a lower interest rate and provide stability for the remainder of the loan term.

When Interest Rates are Low: Your adjustable rate mortgage (ARM) interest rate and payment may be lowered by refinancing if rates have fallen since you first got the loan.

When Your Financial Situation Has Changed: If you have experienced a significant change in your financial situation, such as a promotion or a reduction in income, refinancing can help you adjust your mortgage payment to better fit your budget.

Considerations When Refinancing an ARM Loan

Before you decide to refinance your ARM loan, there are several important considerations to keep in mind:

Cost: Refinancing can be expensive, including appraisal fees, title insurance, and origination fees. Make Sure to factor in these costs when determining if refinancing makes financial sense for you.

Loan Term: You may save money on interest and payments in the long run if you refinance to a shorter loan term, but your payments may be higher in the short term. Consider your financial goals and timeline when deciding the best loan term.

Credit Score: The refinancing rate and conditions given to you will depend heavily on your credit score. Make sure to check your credit score and work to improve it if necessary before applying for a refinance.

Mortgage Insurance: As a general rule, mortgage insurance is only needed if the borrower has less than 20% equity in the house.Refinancing may not be worth it if mortgage insurance costs are higher than savings from the lower interest rate.

Prepayment Penalty: A prepayment penalty is a fee assessed for paying off an ARM loan before the end of the loan term. Review your loan agreement to determine if a prepayment penalty applies and factor this into your decision to refinance.


Refinancing an ARM loan can give homeowners a more favorable mortgage, including a lower interest rate, monthly payment, or both. It is important to consider the costs and benefits of refinancing, including your credit score, loan term, and mortgage insurance requirements. Work with a trusted mortgage professional to determine if refinancing is the right choice for you.