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February 22, 2024

The Pros and Cons of Refinancing Your ARM Loan

Dive into the realm of mortgage refinancing as we unravel the complexities and benefits of transitioning from an adjustable-rate mortgage (ARM) to a fixed-rate loan. In this comprehensive guide, we delve into the factors influencing ARM rates, the pros and cons of refinancing, and the current market landscape in Florida. Whether you're seeking stability or aiming to capitalize on favorable rates, our exploration offers invaluable insights to help you make informed decisions about your mortgage journey.

This blog is for educational purposes only, not an offer of credit or advertisement for current loan terms. It does not provide legal advice. Refer to our loan web pages or consult professional advisors for specific information.

Borrowers who initially got an adjustable-rate mortgage, commonly known as an ARM loan, can later choose to refinance to a fixed-rate loan.

ARM loan interest rates fluctuate periodically at established intervals.

Depending on the current market, this can either be helpful to the borrower and lower their mortgage payment, or it could potentially increase it.

That’s why some borrowers eventually choose to refinance their ARM loan.

Let’s take a look at the pros and cons of refinancing your ARM loan to help you make the best decision for your unique goals and lifestyle.

Start your application with MIDFLORIDA Credit Union.

What is an ARM and how does it work?

When you apply for a conventional mortgage, you have the option to choose a fixed-rate or adjustable-rate mortgage.

A fixed-rate mortgage has a fixed interest rate that remains the same throughout the life of the loan. This offers borrowers stable, predictable payments.

On the other hand, it also prevents borrowers from accessing a lower mortgage rate if rates go down during the life of the loan. To access this lower rate, they would have to refinance their loan.

An adjustable-rate mortgage generally offers a lower, fixed introductory rate for a set period. Once this period is up, rates adjust at set intervals.

Common types of ARMs include:

  • 5/1: Fixed interest rate for five years, then rate adjusts once per year
  • 5/6: Fixed interest rate for five years, then rate adjusts every six months
  • 7/6: Fixed interest rate for seven years, then rate adjusts every six months

ARM loans have caps that limit how high interest rates can rise from the starting rate. Ask your lender to explain your specific caps so you know what to expect throughout the life of your loan.

ARM interest rates are tied to a benchmark rate, and lenders add a margin to the index that will be discussed in your loan agreement.

Do ARM rates ever go down?

While it’s impossible to predict exactly how mortgage rates will trend at the end of an ARM’s initial lower-rate period, it is possible that rates could go down.

Borrowers must carefully weigh the risks and benefits for either outcome—a rate increase or decrease—when they decide to get an ARM loan.

Can you refinance an ARM loan?

Borrowers can refinance an ARM loan at any time, as long as they qualify for a new loan with their lender and it makes sense financially.

Many people choose to refinance before their introductory fixed-rate period is set to adjust.

You can refinance to a fixed-rate mortgage, or you can refinance to another adjustable-rate mortgage.

Refinancing to a fixed-rate loan can make sense if the borrower wants predictable monthly payments while refinancing to another ARM can be helpful if current ARM rates are lower than what you’re paying.

What are the pros and cons of refinancing an ARM?

Refinancing involves replacing your current mortgage with a new one, with different terms, interest rates or loan structures.

It’s important to weigh the costs, benefits and drawbacks of refinancing an ARM loan before you make your decision because sometimes it doesn’t make sense financially.

A mortgage specialist can help you determine your potential savings with a refinance.

Let’s explore the pros and cons of refinancing an ARM loan to help you make the right decision.

Pros of refinancing an ARM

  • Fixed-rate stability: Refinancing to a fixed-rate mortgage provides a stable payment structure and protects the borrower from future interest rate hikes
  • Lower interest rates: If current interest rates are lower than your ARM rate, refinancing can lead to lower monthly payments and overall interest costs
  • Budgeting predictability: With a fixed-rate mortgage, your monthly payments remain constant, providing better budgeting predictability compared to the variable rates of ARMs
  • Long-term savings: If you secure a lower interest rate, you’ll save money over the life of the loan

Cons of refinancing an ARM

  • Closing costs: Refinancing involves closing costs, which can negate the financial benefits—especially if you don't stay in the home long enough to recoup those costs
  • Potential for higher payments: If you refinance to a fixed-rate mortgage, you may have higher monthly payments than you did with your initial ARM payments
  • May miss out on savings: If you refinance to a fixed-rate mortgage and interest rates drop, you could miss out on the potential savings you would have had if you kept your ARM loan

Before refinancing, carefully evaluate the specific terms of the new loan with your mortgage lender.

It’s important to calculate the break-even point to determine how long it will take to recoup the costs of refinancing.

What are the ARM rates in Florida today?

Your interest rate depends on multiple factors, including your credit score, loan amount, down payment amount, loan terms, etc.

According to the Consumer Finance Protection Bureau’s interest rate tool, 5/1 ARM rates in Florida in mid-December were at about 7.1 percent, compared to 30-year fixed rates at 7.5 percent.

The data was based on a credit score range of 680-699, a home price of $200,000 and a 10 percent down payment amount.

Generally, a higher credit score and down payment amount will result in a more favorable rate.

The lenders in the CFPB interest rate data include a mix of large banks, regional banks and credit unions, with data updated semi-weekly every Wednesday and Friday.

Is an ARM a good idea in 2024?

Interest rates are predicted to decrease slightly throughout 2024.

Due to the current rate environment, an ARM loan may be a helpful option for borrowers who are seeking an initial lower rate for a set period.

By the time the period is over, rates could potentially continue decreasing for continued ARM loan benefits.

ARM loans also may be a good idea for borrowers who intend to refinance or sell their home before the initial low-rate period ends.

Discuss your options with a reputable, trusted mortgage lender who can help you navigate all the potential circumstances surrounding an ARM loan.

Apply for a loan with MIDFLORIDA Credit Union

MIDFLORIDA Credit Union is ready to help you navigate the opportunities and complexities associated with an ARM loan, and ensure you have all the information you need to make the best decision.

Start your application with MIDFLORIDA Credit Union today to unlock your personalized rate and loan options.

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