Refinancing an ARM into a Fixed Rate

Two immediate benefits are possible when you refinance an adjustable rate mortgage (ARM) into one with a fixed rate. First, there’s a good chance your monthly payment will be lower. And second, the better fixes rate will be locked in as long as you continue owning the home.

There is no doubt introductory rates on today’s ARMs are tempting. On average these rates are hovering around 5.59%. But still, experts advise against this type of mortgage product. Why? Because even if the interest rate does not increase your monthly payments may still increase once the teaser introductory rate ends.

After introductory rates expire, most ARMs are tied to the one-year Treasury rate PLUS a predetermined margin of about 2.75 percentage points. (At the time of this publication, the one-year Treasury rate was 5.25%.) Rates can increase up to 2 points/year. So even if an interest rate has not changed, when the ARM adjusts at the start of the second year, in such a scenario you would be paying 7.59% because of the full 2-point increase. At the start of the third year, the rate would adjust even higher, up to 8%.

ARMs are however, a good choice for some homeowners. If you’re certain you will not remain in the home longer than 5 years, you may want to consider a 5-year ARM, which at the time of publication averaged 6.62%. Rates on this type of mortgage are fixed for the first 5 years, after which they adjust every year.