When is it good to make use of adjustable rate mortgage (arm) refinance to fixed rate mortgage (frm)?


There is usually a lot calculation involved in assessing whether and when to use adjustable rate mortgage (arm) refinance to fixed rate mortgage (frm) once the fixed period has expired. It may involve calculating different scenarios and none will be the best one with certainty, since the interest rates may go up and stay high, drop down and stay low, or keep fluctuating for the whole period of your ARM. There is no way you can predict any of that for sure.

The adjustable rate mortgage, however, can be particularly straining to have since it unnerves borrowers any time upward adjustment comes around. You may like to refinance an ARM into an FRM for that single reason. Certainly, if your current ARM interest rate is considerably lower than that for an FRM, just make use of it. However, if the ARM rate gets adjusted upwards consecutively, it will certainly be a strong case so that you finally refinance to an FRM even when you are protected by the ARM annual and/or lifetime cap.

Well, refinancing from an ARM to an FRM will most probably become pending at certain point. The question is when you should do the refinance. There are some clear cases when it is obvious that you should or should not refinance straight away, such as a very low or very high ARM and FIR rates compared to the FRM rate, FIR standing for the fully-indexed rate. In all other cases the only choice is whether to wait until next ARM rate adjustment.

How to determine when to refinance from ARM to FRM?

  • In case ARM and FIR rates are lower than the FRM rate, refinancing would be very premature.
  • When the ARM and FIR rates are higher than the FRM rate, this is a strong case for refinancing.
  • In case of the FRM rate holding position between the ARM and FIR, the situation may be easily reversed at the next ARM rate adjustment.

So, going for a refinance from an ARM to FRM is a personal decision and in case you have decided to give up worries related to constantly watching over indices, if your ARM starts climbing and approaches the FRM, you may like to just refinance and forget it. Although someone else may not be willing to give up the ARM potential rate drop.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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