Adjustable-rate mortgages (ARMs) can be a smart way to get a lower interest rate upfront, but they come with a catch: your rate isn’t locked forever. Once the introductory fixed period ends, your rate will adjust based on market conditions—and often upward. If you’re approaching that adjustment period, refinancing into a more stable loan could save you from rising payments and financial uncertainty.
This article will walk you through how to refinance an ARM before your rate adjusts, why timing matters, what to consider when choosing your next loan, and how CapCenter can help you save thousands with our Zero Closing Cost refinance.
Understanding Adjustable-Rate Mortgages
ARMs start with a fixed interest rate for a set period—often 5, 7, or 10 years. After that, the rate adjusts at predetermined intervals (usually once a year) based on a benchmark index like the SOFR (Secured Overnight Financing Rate) plus a margin set by your lender.
For example, if you have a 5/1 ARM:
- The “5” means your initial rate is fixed for five years.
- The “1” means your rate adjusts every year after that.
The appeal is clear: ARMs often come with lower introductory rates than 30-year fixed-rate mortgages. But once the adjustment kicks in, your monthly payment could climb significantly—sometimes by hundreds of dollars.
Why Timing Matters
Refinancing before your ARM adjusts is crucial because once that adjustment happens, your new, higher payment will immediately affect your budget. And if rates have risen since you first bought your home, the adjustment could be steep.
Key reasons to refinance early:
- Avoid “payment shock”: A sudden jump in monthly payments can strain your finances.
- Capitalize on predictable costs: Locking in a fixed rate provides long-term stability.
- Secure today’s rates: Even if rates aren’t at historic lows, refinancing now could still be better than waiting. See Todays Rates!
- Protect your home equity: Higher payments could increase financial strain and risk if your budget is already tight.
Waiting too long may also reduce your options if interest rates climb further or if your financial profile changes (like a dip in credit score or rising debt levels).
Step 1: Evaluate Your Current ARM
Before making a move, take a close look at your current loan terms. Pay attention to:
- Your current balance: How much do you still owe?
- Adjustment date: When does your rate actually reset?
- Caps on adjustments: Most ARMs limit how much the rate can increase in a single adjustment or over the life of the loan.
- Current rate vs. potential future rate: Compare your existing rate to current market rates for fixed mortgages.
Knowing these details will help you decide whether refinancing makes sense now or whether you have a little more time to prepare.
Step 2: Check Your Credit and Finances
Refinancing is essentially applying for a new loan, so lenders will check your credit score, debt-to-income ratio, and overall financial health. The stronger your profile, the better rate you’ll qualify for.
- Credit score: A higher score could mean thousands saved over the life of your new loan.
- Debt-to-income ratio (DTI): Lenders prefer DTIs below 43%, though some exceptions apply.
- Employment and income: Stable, verifiable income is a must.
Tip: Review your credit report ahead of time and address any errors or issues. Even a small improvement in your credit score could lower your interest rate. For tips to improve your credit click here.
Step 3: Explore Loan Options
When refinancing out of an ARM, most homeowners consider a fixed-rate mortgage. The predictability of a 30-year fixed loan is appealing, but it’s not the only option:
- 30-Year Fixed: Offers long-term stability with the same payment for the life of the loan.
- 15-Year Fixed: Higher monthly payment, but lower interest rates and faster equity buildup.
- Another ARM: If you know you’ll move within a few years, choosing a new ARM with a fresh introductory period could still be cost-effective.
The right choice depends on your long-term goals, how long you plan to stay in the home, and your tolerance for risk.
Step 4: Calculate Your Break-Even Point
Every refinance has costs—but at CapCenter, we eliminate that hurdle with our Zero Closing Cost refinance. Traditional lenders typically charge thousands in closing costs, meaning you’d need to stay in your home long enough to “break even.” With CapCenter, that math changes. Your savings start immediately because you don’t pay those upfront fees.
For example:
- A homeowner with a $300,000 loan balance sees their ARM adjust from 5.25% to 7.25%.
- Monthly payment increase: roughly $360 more per month.
- Refinancing into a 30-year fixed at 6.25% could keep their payment stable—without paying $5,000+ in closing costs.
That’s a direct path to savings without the usual tradeoffs.
Step 5: Start the Application Process Early
Don’t wait until the last minute. Refinancing can take several weeks, and if you start too close to your adjustment date, you may end up stuck with a higher payment before your new loan closes.
Here’s what to expect:
- Prequalification: Get an estimate of what rates and terms you may qualify for.
- Application: Submit your financial documents (pay stubs, bank statements, tax returns).
- Appraisal (if required): Some refinances require an updated home appraisal, though certain loan types or lender programs may waive it.
- Underwriting: The lender reviews and verifies your information.
- Closing: You sign the final documents and your new loan replaces the old one.
CapCenter’s streamlined, in-house process means fewer delays and faster closings—helping you avoid getting caught in your ARM’s adjustment window.
FAQs About Refinancing an ARM
Can I refinance before my ARM adjusts if my credit isn’t perfect?
Yes, though your rate may be higher. Even with less-than-ideal credit, refinancing could still save you money compared to letting your ARM adjust.
What if interest rates are higher than my current ARM rate?
Even if market rates are higher, refinancing may still protect you from steeper increases in future adjustments. Stability often outweighs short-term rate comparisons.
Do I need equity in my home to refinance?
Typically, yes. Most lenders prefer at least 20% equity, but there are programs that allow refinancing with less. CapCenter can review your specific situation.
Can I refinance into another ARM?
Yes, if you’re planning to sell or move before the new fixed period ends, another ARM might make sense.
Why Refinance with CapCenter?
Refinancing before your ARM adjusts is all about saving money and reducing uncertainty. CapCenter takes that a step further:
- Zero Closing Costs: We cover the lender fees, appraisal, title, and other closing costs that traditional lenders pass on to you.
- Great Rates: Competitive pricing across purchases and refinances.
- Streamlined Process: With in-house teams handling everything from underwriting to closing, we make the refinance experience faster and easier.
- Trusted Partner: For over 27 years, CapCenter has helped homeowners across Virginia, the Carolinas, Georgia, Florida, Ohio, Maryland, and DC save thousands.
Before your ARM resets, protect your finances with a refinance that makes sense for the long term. Start your refinance with CapCenter today.
Conclusion
Refinancing an ARM before your rate adjusts isn’t just about convenience—it’s about protecting your home, your budget, and your peace of mind. By acting early, you can lock in stability, avoid payment shock, and set yourself up for long-term savings. And with CapCenter’s Zero Closing Cost refinance, the decision becomes even easier.
If your ARM adjustment is on the horizon, now is the time to explore your options and take control of your mortgage future.
