Refinancing an Adjustable-Rate Mortgage: A Comprehensive Guide

Are you considering refinancing your adjustable-rate mortgage (ARM)? At O1ne Mortgage, we understand that navigating the complexities of mortgage refinancing can be daunting. That’s why we’re here to help you every step of the way. Call us at 213-732-3074 for any mortgage service needs. In this blog, we’ll explore the ins and outs of refinancing an ARM, when it makes sense to do so, and how you can go about it.

Is It Possible to Refinance an Adjustable-Rate Mortgage?

Yes, you can refinance an adjustable-rate mortgage just like any other type of mortgage. Refinancing can be particularly appealing if you want to start with the lower rate and monthly payment that ARMs offer but are concerned about future rate increases. By refinancing, you can lock in a fixed rate, potentially saving you money in the long run.

Refinancing an ARM involves qualifying and applying for a new mortgage, then using the proceeds to pay off your existing ARM. You have the option to refinance with various types of new mortgages, such as a 20- or 30-year fixed-rate mortgage, or even a new ARM. This flexibility allows you to choose the best option for your financial situation.

When to Consider Refinancing an ARM

Refinancing an ARM can be a smart move in several scenarios:

• Qualify for Better Rates: If your credit scores have improved or you can afford a larger down payment, you might qualify for a lower rate, even if mortgage rates have increased since you originally bought your home.
• Switch to a Fixed-Rate Loan: Refinancing with a fixed-rate mortgage can eliminate the risk of your interest rate and payment increasing.
• Change Your Repayment Term: Taking out a shorter- or longer-term loan can affect your interest rate and monthly payment.
• Get Rid of Mortgage Insurance: If you now have at least 20% equity in your home, you might be able to get a new mortgage without mortgage insurance, lowering your monthly payments and saving you money.

Other reasons to refinance might include putting the mortgage in one person’s name after a divorce or using a cash-out refinance to access the equity you’ve built up in your home.

How Much Does Refinancing an ARM Cost?

While refinancing can make financial sense and reduce the risk associated with an adjustable-rate loan, there are upfront costs to consider:

• Closing Costs: Similar to when you first get a mortgage, you’ll have to pay closing costs for your new mortgage, which can range from about 2% to 5% of the loan’s balance. Some mortgages advertise no closing costs, but they may have higher interest rates or roll the costs into your loan amount.
• Prepayment Penalties: Some ARMs have prepayment penalties, which could cost you thousands of dollars. Review your loan’s terms carefully, as the prepayment penalty may only apply during the initial period.

How to Refinance an Adjustable-Rate Mortgage

If you’re considering refinancing your adjustable-rate mortgage, follow these six steps:

1. Check Your Credit

Your credit scores can directly impact your eligibility for various types of mortgages and the interest rates you receive. You can check your FICO® Score 8 for free from Experian, but you may also need to pay to check the credit scores that mortgage lenders use.

2. Calculate Your Target Loan Offer

Consider the potential closing costs, your mortgage’s balance, interest rate, remaining term, and prepayment penalties to determine what rates and terms you’d need to receive to make refinancing worthwhile. Use online calculators to help you find a target range.

3. Get Prequalified or Preapproved

Start shopping for mortgages to see if you’ll qualify for an offer in your target range. Prequalification can give you a rough idea of your options based on your basic financial information. Preapproval is a more rigorous process, similar to the actual loan application, that can give you more precise loan offers.

4. Review the Loan Offers

Look over the prequalification or preapproval offers to see if refinancing makes sense. Pay close attention to the fine print, not just the interest rate and repayment term. For example, if you’re refinancing with a new ARM, see if the lenders offer different interest rate caps or prepayment penalties.

5. Submit the Application

If you decide refinancing makes sense, complete the application with the lender that gives you the best offer. Closing on your new loan might take around four to six weeks, depending on whether you need an appraisal or inspection.

6. Make It Official

Sign your new loan agreement to complete the refinancing. Your new lender will then pay off your old loan, and you’ll start making payments to your new loan servicer.

Monitor Your Credit if You’re Thinking About Refinancing

Monitoring and improving your credit can be crucial when you want to refinance your mortgage. Avoid applying for other credit accounts to prevent lowering your score, and focus on paying down credit card balances to lower your credit utilization rate. You can track your progress with free credit report and score monitoring from Experian and get tips on improving your credit.

At O1ne Mortgage, we’re committed to helping you make the best financial decisions for your future. If you’re considering refinancing your adjustable-rate mortgage, don’t hesitate to call us at 213-732-3074. Our team of experts is here to guide you through the process and ensure you get the best possible terms for your new mortgage.