Refinance Your ARM to a Fixed-Rate Mortgage: How It Works

Published April 28, 2022

While there are plenty of benefits to an adjustable-rate mortgage (ARM), many homeowners prefer a fixed-rate loan. As a result, you might be particularly interested in refinancing if you're getting close to the end of your ARM's introductory period. Fortunately, it is possible to refinance from an ARM to a fixed mortgage. Here is everything you need to know about refinancing your mortgage from adjustable to fixed.

How to refinance from ARM to fixed

Refinancing your home requires several steps over the course of a few weeks or months. The following is a step-by-step guide to refinancing from an ARM to a fixed-rate loan: 

1. Choose a strategic time to refinance.

If you're anxious to get rid of your adjustable-rate mortgage, you might decide to go through with your refinance as soon as possible – no matter the circumstances. However, you'll benefit the most by timing your refinance carefully. 

Most homeowners who refinance an ARM to a fixed loan do so near the end of their introductory period. This way, they get the low introductory rate for as long as possible, but they can then switch to a more stable mortgage before the adjustable-rate increases.

You should also consider the current average mortgage rates. If they're currently low but are starting to increase, now is the perfect time to refinance your ARM to a fixed mortgage. 

2. Consider the term of the loan.

One of the main reasons homeowners refinance from ARM to fixed is to lock in a low interest rate and save money on interest payments. However, if you're trying to reduce the total amount you pay over time, you also need to consider the loan term. Extending the length of time you're paying on your mortgage could end up costing you more.

For example, you might be interested in refinancing from your ARM to a fixed loan with a lower interest rate. However, if you choose a 30-year refinance, you're resetting the clock on your mortgage. Now, you're adding years of interest payments to your balance. Even if the interest rate is lower, the loan might accumulate more interest because you've extended the timeline of the term.

If you've already been paying on your mortgage for a number of years, consider a 15-year refinance or a 20-year refinance. Your monthly payment might increase, but you drastically reduce the amount of interest that accrues. 

3. Gather your paperwork.

The process of refinancing your home is usually quite similar to applying for an initial mortgage. However, suppose you have an FHA mortgage. In that case, you may be able to simplify the refinance process through the Simple Refinance or Streamline Refinance programs, which will use the information from your original mortgage application. Otherwise, you should expect to gather all your paperwork and information again.

When you apply, we'll provide you with a detailed list of the documents we need to process your refinance application. The following are some of the items we will likely ask for:

• Recent pay stubs

• Bank statements

• Tax returns

• Proof of assets and debts

• Copy of homeowners insurance policy

4. Prepare for your appraisal.

Refinancing from an ARM to a fixed-rate loan usually requires an appraisal. The lender chooses the appraiser in most cases, but the borrower pays the fee. If you've made repairs or improvements to the property, make sure your lender and the appraiser are aware. If the home's value has increased since you purchased it, you might be able to forgo PMI with your new loan. 

5. Lock in your interest rate.

With a fixed-rate loan, your interest rate stays the same for the entire lifespan of the mortgage. However, if rates are trending up while you're in the process of refinancing, you should look into locking in your interest rate with your lender. Refinancing can take a long time, and mortgage interest rates can fluctuate significantly while you wait for your closing date. Even a fraction of a percentage point can make a massive difference in the amount of interest that accrues, so solidifying a low interest rate before rates rise is critical.

You and your lender can agree to lock your interest rate for a certain amount of time. Mortgage rate locks usually last between 15 and 60 days, but the specifics vary. 

Pros and cons of refinancing an ARM to a fixed loan

Your mortgage payment is probably your biggest monthly expense, so any decisions regarding your loan should not be taken lightly. It can be challenging to know whether a refinance from an ARM to a fixed mortgage is a good idea, but you can weigh the pros and cons to make up your mind.

Advantages of a fixed-rate refinance

Stability is the key advantage of a fixed-rate mortgage refinance. While you likely have a locked-in rate for the first five or seven years of your ARM, your interest rate may change yearly after that introductory period. Not knowing what to expect for a monthly mortgage payment can be very stressful, so homeowners often choose to refinance from an ARM to a fixed loan to secure a predictable payment schedule. 

With a fixed-rate mortgage, you can budget for your home payment more efficiently. In addition, you know what to expect next year and the year after, and you don't have to worry that your payment will suddenly increase and create unexpected financial strain. 

Fixed-rate loans tend to be a better long-term option than ARMs. An adjustable mortgage can offer a great interest rate for the first few years, but securing a fixed-rate loan when interest rates are low will save you a considerable amount in interest over decades. This is an especially valuable option if you plan to stay in your home for a long time. 

Disadvantages of a Fixed-rate Refinance

The major disadvantage of a fixed-rate refinance is that you don't get the competitive introductory rate of an ARM. Rates for fixed loans are usually slightly higher than the initial rates for adjustable mortgages. 

If mortgage rates are high when you refinance from ARM to fixed, you're stuck with a high interest rate for the remainder of your repayment period. Your only option for decreasing your interest rate is to refinance a second time when rates decline.

All types of refinancing come with closing costs, which offset some of the savings from locking in a lower rate. Closing costs are usually 2% to 5% of the total loan amount, and you can either pay out-of-pocket or include the fees in your mortgage balance. 

You can refinance from an ARM to a fixed mortgage to secure a low interest rate and create stability in your monthly payments. Many homeowners find that the benefits of a fixed-rate loan are worth the costs of refinancing. If you're considering a fixed-rate refinance, schedule an appointment with us. We're happy to talk through which options are best for you.