Can You Refinance an Adjustable-Rate Mortgage?

If you have an adjustable-rate mortgage you’re looking to get out of, the good news is it’s usually as simple as applying for a refinance.

The bad news is the interest rate might be a lot higher today, assuming you locked in a super-low rate several years ago.

This has been a common scenario lately, with homeowners opting for ARMs when it appeared mortgage rates would never go up again. And failing to refinance before rates went up.

Of course, we were all caught by surprise at just how quickly rates increased, and by how much!

For reference, the 30-year fixed climbed from around 3.25% to start 2022 to roughly 6.5% to end that year, then kept rising from there. Ouch!

Why Do You Want to Refinance Out of the ARM?

Before we discuss the process, let’s talk about the why. Why do you want/need to refinance out of the adjustable-rate mortgage?

My assumption is the number one reason why someone would want to refinance an ARM would be to avoid a rate reset.

By rate reset, I mean an adjustment where the interest rate increases, sometimes by a sizable amount.

Many ARMs today are hybrids in that there is a fixed-rate period followed by an adjustable-rate period.

For example, the 5/6 ARM features a fixed interest rate for the first five years (or 60 months) and the 7/6 ARM is fixed for the first seven years (or 84 months).

After that time, the loans can adjust every six months for the remainder of the loan term, which is 30 years.

This means you’ve got 25 years of potential rate adjustments with a 5-year ARM, and 23 years of rate adjustments on a 7-year ARM.

The somewhat good news is that ARMs have caps that limit the movement of these adjustments.

Typically, the rate can only increase two percentage points at its initial adjustment. Still, that could be a big jump in monthly payment if it did.

It’s for this very reason that borrowers will often refinance before the loan becomes adjustable.

Like the Original Mortgage, You Need to Qualify for the Refinance Too

You can refinance an ARM just like any other type of mortgage, assuming there isn’t a prepayment penalty and that you qualify for a new loan.

Those are the two key issues. Most loans today don’t have prepayment penalties anymore, so that likely won’t be an issue. But it’s always prudent to check just in case.

Even if there is a prepay, you can still refinance, you’d just be subject to a fee and would need to factor that into your decision.

The second part is qualifying for a mortgage. Just as when you took out your original mortgage, you need to qualify.

This means having adequate income, assets, employment and credit history to get approved for a home loan.

Without that, you could be out of luck and stuck in your ARM until your situation changes.

Potentially exacerbating this issue is the fact that the mortgage rate could be higher on the new mortgage.

That means you might have a higher monthly payment, and thus an elevated debt-to-income ratio (DTI), which could jeopardize your loan application.

One of the leading causes of a mortgage being declined is a DTI ratio that is too high. So this is definitely something to take seriously.

Anyway, if you believe you can satisfy the qualifying piece and there’s no penalty to refinance, the next step is picking a product that makes financial sense.

Tip: If you have trouble qualifying for a refinance, adding a co-borrower such as a spouse could get you over the finish line.

Can You Refinance an ARM to a Fixed-Rate Loan?

Now let’s talk about refinance options. Like any other home loan, you can refinance an ARM into any other type of mortgage, assuming you qualify.

The more common option over the past few years, before mortgage rates went up, was refinancing an ARM into a fixed-rate loan.

I in fact did this myself in early 2022 and not a moment too soon. I originally had a 5/1 ARM and refinanced into a 30-year fixed just in the nick of time.

This was a very straightforward refinance process where I simply applied for a new 30-year fixed loan that paid off my ARM.

It’s no different than any other rate and term refinance, where one loan is paid off with another.

Of course, you could also tap your home equity at the same time, known as a cash-out refinance.

So back then when mortgage rates were still near rock-bottom, you could refinance out of an ARM and into a fixed-rate mortgage, while also getting cash.

This was a pretty sweet deal for many, who could ditch the risk of the ARM and tap their equity, all in one fell swoop.

Unfortunately, some homeowners missed the boat on this. As I mentioned, mortgage rates caught a lot of folks by surprise by just how quickly they went up.

I have a friend who got caught in this mess and wasn’t able to snag a low rate because he kept putting it off and assuming rates would calm back down.

Can You Refinance an ARM to Another ARM?

That brings me to the other option. Refinancing an ARM into another ARM.

Yep, this is also possible as there’s really no restriction on loan type when refinancing, so long as the bank offers it and you qualify.

Sometimes homeowners will simply refinance from ARM to ARM instead of going with a fixed-rate mortgage.

This can be a strategy employed by wealthy homeowners, who have the ability to pay off the loan in full at any time, but want to put their money to work elsewhere.

It’s also used by everyday homeowners who want the discount an ARM affords, instead of paying a premium for a FRM.

Lately, the discounts haven’t been great on ARMs, though I’ve found that credit unions sometimes offer good deals.

So hypothetically, you can take out a hybrid ARM like a 5- or 7-year ARM, then refinance every few years if/when rates go down, or even if they stay the same.

And the savings via the lower rate mean you’ll have a smaller outstanding balance. The downside is you’ll reset the clock on your mortgage each time you refinance.

In other words, if you’re serious about paying it off in full, this might not be a great strategy.

For my buddy, he refinanced to another ARM only because the rate was about 1% lower. In a perfect world, he wanted a low fixed-rate mortgage.

Now he has to settle for a more expensive ARM, but the alternative was a rate adjustment to say 8.5% or a fixed-rate mortgage set at 7% or higher (some ARMs can rise 5% at the first adjustment!).

In the meantime, he can wait for rates to come down, assuming they do, and refinance again if it makes sense.

Of course, in a super perfect world an ARM could adjust to a comparable rate (assuming rates were flat or came down) and not even require a refinance, but I wouldn’t necessarily bank on this.

You Can Refinance an ARM at Any Time, But Most Do So Before the Fixed Period Ends

Let’s talk about when to refinance out of an adjustable-rate mortgage, since time will be a crucial factor.

You can refinance an adjustable-rate mortgage at any time, whether it’s during the fixed-rate period of during the adjustable period.

As I stated, you just have to qualify and hope there’s not a prepayment penalty. You also want to get some sort of payment relief in the process, otherwise what’s the point?

Granted, in the past few years there were probably cases where a homeowner refinanced from an ARM to a FRM, despite the rate being higher.

For example, going from an adjustable rate of say 3.5% to a fixed rate of 4.5% or even higher, to avoid even higher rates that eventually surfaced.

Remember, the 30-year fixed hit 8% in late 2023, so a rate of 4.5%, even if higher than the 3.5% rate on the ARM, was a good deal in hindsight.

And even if the borrower had another couple years where the rate was fixed at 3.5%, it still could have been wise to jump ship.

This is something you have to consider when taking out an ARM. It’s not a set-it-and-forget-it loan option.

You have to keep an eye on mortgage rates at all times, especially if your loan is close to its first adjustment.

Otherwise you could find yourself in a tough spot, especially if you’re ineligible for a mortgage.

Long story short, ARMs come with more risks than fixed-rate mortgages, and you need a plan if you decide to take one out.

Just make sure the discount justifies the risks involved, and that you’re fairly confident you’ll either be able to refinance in the future, manage higher monthly payments, or pay off the loan in full.

Read on: Fixed-Rate Mortgages vs. ARMs: Which to Choose and Why?

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.

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