When does it make sense to refinance from fixed to arm terms?

Couple looking at mortgage denial letter

The security and consistency of a fixed-rate mortgage can be comforting for homeowners, but sometimes, an adjustable-rate mortgage (ARM) is a better financial option. To refinance from a fixed to an ARM loan is somewhat risky, as you can never be sure how the market and your own financial situation will change. However, in specific circumstances, refinancing to an ARM could save you a lot of money by lowering your interest rate.

To decide whether you should refinance from an ARM to a fixed mortgage, you have to consider your own financial goals and your plan for the future. Of course, everyone’s situation is different, so only you know what your best option is. Here are five situations in which a refinance from a fixed to ARM loan makes sense.

1. You’re going to move in a few years.

ARMs offer an introductory period with an exceptionally low interest rate. In most cases, this low rate lasts for five years, but some lenders offer longer or shorter introductory periods. After your introductory rate ends, your interest may increase considerably. If you’re planning on moving before the end of the initial period, you don’t have to worry about the rate increase.

It can be an excellent idea to refinance from a fixed to ARM loan if you’re confident that you’ll be moving in the next few years. You get to take advantage of the low rate at first, and you’ll already be applying for a new mortgage by the time the rate changes.

Maybe you and your partner are planning on starting a family in a few years, so you know that you’ll be moving into a larger house. Perhaps you expect to move to a new city or state in the near future for a job opportunity. No matter the reasoning, homeowners who are sure that they’ll sell the property before their introductory rate ends can benefit from a refinance from fixed to ARM.

2. You’re going to pay off your home soon.

Just like selling your house allows you to avoid an interest rate increase, paying off the loan before the introductory period ends ensures that you won’t see your rate skyrocket.

You could benefit greatly from a refinance from fixed to ARM if you’re nearing the end of your mortgage repayment. Unless you already have an extremely low interest rate with your fixed mortgage, you’ll probably reduce your rate with an adjustable-rate mortgage refinance. Then, you can cut down on your interest payments while you pay off the remainder of your mortgage balance. A 15-year refinance is an excellent option in this situation because it further lowers your interest rate, allowing you to pay down the principal as quickly as possible.

Reducing your interest rate near the end of your loan doesn’t have as dramatic an impact as it does near the beginning. The balance is lower, so the debt won’t accumulate as much interest. However, every dollar counts when you’re paying off your home.

3. Your income will increase in the near future.

The uncertainty of an ARM is the biggest downside to this refinancing option. You know that you’ll get a low interest rate for the first few years, but it’s hard to predict how your monthly payment will change after that.

You might decide that a refinance from fixed to ARM is worthwhile if you expect your income to increase by the end of the introductory period. By the time the higher interest rate sets in, you’ll be bringing home more money and can handle the potential increase in your mortgage payment. For instance, this option might make sense if you’re completing a graduate degree that will increase your earning potential or if you’re on track for a promotion at your current workplace.

4. You’re expecting to refinance again.

You always have the option to refinance a second time after the introductory rate for your ARM ends. However, refinancing is time-consuming, so most homeowners don’t want to go through the experience multiple times in a decade. If you’re willing to refinance again, though, you could go back to a fixed-rate mortgage once you’re done with the introductory period of your ARM.

5. You want the lowest possible interest rate right now.

Paying off a mortgage is a long-term commitment, so you shouldn’t only think about your short-term needs. It can be risky to prioritize your current financial situation without planning ahead. However, there are plenty of reasons you’d want to reduce your monthly payment as much as possible.

For example, if you’re going through financial hardship, you might decide to refinance from a fixed to an ARM loan to lower your monthly payment. By cutting down on your expenses, you can reduce your risk of foreclosure. Then, once you’re back on your feet, you can reevaluate your situation.

What to expect with a fixed to ARM refinance

Most homeowners refinance from an ARM to a fixed loan, not from a fixed mortgage to an ARM. A fixed-rate mortgage is generally a better option for homeowners planning to grow roots and stay in their homes for a long time. It’s often a natural transition to refinance from an ARM to a fixed mortgage. However, because a refinance from fixed to ARM is less common, you might have a more challenging time finding a lender.

A refinance from fixed to ARM is possible with American Financing. We are equipped to understand and support your unique situation, and we can offer a loan that best meets your needs. In many ways, the process of refinancing is the same as the process of applying for your original mortgage. If you can collect your proof of income, tax information, and other financial documents, you should be able to get approved for a refinance.

You might decide to refinance from a fixed to an ARM loan if you anticipate a change in your near future. Whether you’re going to move, pay off your mortgage, or refinance again in a few years, you could benefit from the low introductory rate of an ARM in the meantime. If you’re interested in this form of refinancing, you can contact us today or schedule an appointment to discuss your options.

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