Refinancing An ARM Loan

Stuck in a loan with a rising interest rate?  After an initial period of low payments, adjustable-rate mortgage or ARM loan terms can be very financially damaging for borrowers. 

Refinancing with an ARM can get you out of this volatile situation and help you secure a stable, fixed interest rate on your mortgage.

Refinancing An Existing ARM Loan

Refinancing an adjustable rate mortgage into a fixed rate mortgage can save you a lot of money over the years. An adjustable rate mortgage will cause your interest rate to increase over time. 

A fixed mortgage term will allow you to pay off your mortgage sooner and at a lower interest rate.

Refinancing Into An Adjustable-Rate Mortgage

The appeal of an adjustable rate mortgage (ARM) is typically a lower interest rate for a predetermined period, often three, five or seven years. 

However, in spite of the temporarily lower monthly payments offered by ARMs, most borrowers prefer to refinance with a fixed rate mortgage loan for long term stability.

ARM Refinance Eligibility

Most lenders will ask for 20 percent equity in your home. If you have excellent credit and high income, these standards may be reduced to as low as 10 percent equity. Anything less than 20 percent equity and the borrower is required to pay Private Mortgage Insurance, which increases your monthly mortgage payment.

Lenders will qualify you for an ARM loan at an interest rate that is 2 percent above the initial rate, meaning a ARM with a rate of 3.5 percent will require a borrower to have a debt-to-income ratio to qualify the borrower at 5.5 percent.

Planning Ahead

If you plan to move in five years, give yourself a buffer and go with a seven year ARM. Play it safe and allow yourself room for unanticipated events in the future.

Always take into account the possibility that you could end up paying the maximum amount after your ARM adjusts in a few years. Be wary of using an ARM to qualify for a larger mortgage, as this is potentially risky financial territory to be in.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.