ARMs can be more complicated

Glossary Terms

Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that can change during the term of the loan. The timing and calculation of adjustments (also called resets) are... <a href='/glossary/what-is-adjustable-rate-mortgage' title='See the full definition of Adjustable Rate Mortgage (ARM)'>read more</a>
5 Year ARM
A 5 year ARM is a loan with a fixed rate for the first 5 years that has a rate that changes once each year for the remaining life of the loan. <a href='/glossary/what-is-5-year-arm' title='See the full definition of 5 Year ARM'>read more</a>
1 Year ARM
A 1 year ARM is a loan with a fixed rate for the first year that has a rate that changes yearly for the remaining life of the loan. <a href='/glossary/what-is-1-year-arm' title='See the full definition of 1 Year ARM'>read more</a>
7 Year ARM
A 7 year ARM is a loan with a fixed rate for the first 7 years that has a rate that changes once each year for the remaining life of the loan. <a href='/glossary/what-is-7-year-arm' title='See the full definition of 7 Year ARM'>read more</a>
10 Year ARM
A 10 year ARM is a loan with a fixed rate for the first 10 years that has a rate that changes once each year for the remaining life of the loan. <a href='/glossary/what-is-10-year-arm' title='See the full definition of 10 Year ARM'>read more</a>
2 Year ARM
A 2 year ARM is a loan with a fixed rate for the first 2 years that has a rate that changes once each year for the remaining life of the loan. <a href='/glossary/what-is-2-year-arm' title='See the full definition of 2 Year ARM'>read more</a>
3 Year ARM
A 3 year ARM is a loan with a fixed rate for the first 3 years that has a rate that changes once each year for the remaining life of the loan. <a href='/glossary/what-is-3-year-arm' title='See the full definition of 3 Year ARM'>read more</a>

There's a lot to think about when refinancing an ARM. Should you refinance to a fixed rate mortgage (FRM) or to another adjustable rate mortgage? Those who get it right can save themselves serious amounts of money. However, it's also possible to lose big, so it's important to understand the factors that make ARMs good and bad risks, and then consider them as they relate to your personal circumstances.

Convert an ARM to a fixed-rate mortgage
Rather than waiting for the inevitable rate hike when your ARM matures, why not get locked into a rate you’re comfortable with right now? It pays to look into this so you’re not overpaying and overextending your budget.
Adjustable rate mortgage (ARM)
ARM loans typically start at an interest rate that’s lower than the market rate; however the interest rate can be adjusted – up or down – during the life of the loan. A one-year ARM allows annual adjustments of no more than 1% and a lifetime cap of 5% – this is much better than conventional ARMs, which typically allow adjustments of up to 2% per year and have lifetime caps of 6%.
Hybrid adjustable rate mortgages (HARMs)
This loan combines the advantages of fixed and adjustable rate mortgages. Hybrid ARM loans feature an initial fixed rate for a period of at least three years, followed by annual adjustments. Depending on the length of the fixed rate period, the initial adjustment can be up to 2% and the lifetime cap is either 5% or 6%. Hybrid ARM rates can be significantly lower than fixed rates, and can be a great alternative for anyone who doesn’t plan to keep the loan more than a few years.
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Frequently Asked Questions

Should you refinance your ARM before it resets?

Of course, no one can predict for certain where interest rates will be headed next month, let alone four years from now. Rates may rise like in the example above, or they may decline, in which case you may see your ARM rate stay the same or even decline. Remember, too, that refinancing carries upfront costs that eat into your overall savings. In general, the longer you are planning to stay in your home, the more sense it makes to do it now. 

To help you determine what your new monthly payments are likely to be when your ARM resets, use the LendingTree adjustable rate mortgage payment calculator.

What are the top reasons to consider refinancing an ARM?

1. Your ARM is about to reset at a higher interest rate 2. You believe interest rates are going up long-term 
 3. You want the stability of a fixed rate 
 4. You want to refinance to another ARM 5. You’re staying put for a while 
 6. You’ve got higher-interest rate debt to consolidate 
 7. You want to cash out some of your home equity.

How can refinancing an ARM protect you from rising interest rates?

You can’t control interest rates. But you can protect yourself when rates are on the rise by refinancing your adjustable rate mortgage (ARM). Consider a Fixed-rate mortgage, a hybrid ARM or an ARM with a more stable index or more favorable caps.

When do rising rates may make refinancing ARMs riskier?

Before you decide to refinance your loan, review your current ARM with your loan officer. Find out how much your interest rate and payment could increase and when each adjustment will occur. How comfortable--or uncomfortable--would you be if the worst-case scenario for your ARM came true? If that scenario makes you queasy, refinancing could be a smart way to protect yourself from that risk.

Is it time to refinance your ARM?

As a rule of thumb, it’s worth considering a refinance if your new interest rate will be around 1.5 to 2 percent lower than your current rate. (Otherwise, fees may eat up any potential savings.) Compare your current rate with the posted rates offered by other lenders, but be sure to ask about the index and margin -- if they are different from those of your existing ARM, you may be comparing apples and oranges.