Can You Refinance an ARM to a Fixed-Rate Mortgage?

Refinancing an Adjustable-Rate Mortgage (ARM) to a fixed-rate mortgage is a strategy for homeowners seeking payment predictability. An ARM features an initial fixed interest rate for a set period, after which the rate adjusts periodically based on market indices, leading to fluctuating monthly payments. Converting to a fixed-rate mortgage stabilizes these payments for the remainder of the loan term, offering a clear financial outlook. This guide explores transitioning from an ARM to a fixed-rate mortgage.

Eligibility for Refinancing

Refinancing a mortgage requires meeting specific criteria. Lenders evaluate several factors, with credit score being a primary consideration. Most conventional refinance options require a credit score of 620 or higher. Government-backed loans might have lower minimums, such as 500-580 for FHA loans, or no set minimum for VA loans. A higher credit score results in more favorable interest rates and loan terms.

The debt-to-income (DTI) ratio is another factor, comparing monthly debt payments to gross monthly income. Lenders use DTI to assess a borrower’s capacity to take on new debt. While some lenders may accept higher ratios, a DTI of 43% or less is preferred for mortgage refinancing. This ensures sufficient disposable income after existing debt obligations.

Home equity also impacts refinancing eligibility. Lenders require a certain loan-to-value (LTV) ratio. Lenders look for at least 20% equity for conventional refinances, though some government programs may allow for lower or even negative equity. Property type and condition are also considered to meet lender’s standards.

A consistent payment history on the current mortgage is important. Lenders prefer to see a record of on-time payments for the past 12 months. Any recent late payments could signal a higher risk and potentially affect eligibility or the terms offered.

Required Information and Documentation

Before initiating the refinancing application process, borrowers must gather documents. Personal identification is foundational, including a valid government-issued photo ID and the Social Security Number. This ensures proper identification and helps prevent fraud.

Income verification is another component. Salaried employees need to provide recent pay stubs along with W-2 forms from the previous two years. Self-employed individuals submit federal tax returns from the past two years, and year-to-date profit and loss statements.

Lenders also require asset verification to confirm available funds for closing costs and financial reserves. This includes recent bank statements for checking, savings, and investment accounts. These statements provide insight into a borrower’s liquidity and financial stability.

Information about the current mortgage is necessary. This involves providing recent mortgage statements, the current payoff amount, and original loan documents. Property-related documents, such as property tax statements and homeowners insurance policy, are also required to assess the property’s financial obligations and insurance coverage.

The Refinancing Application Process

Once necessary information and documentation are compiled, the refinancing application process begins with submission to a lender. After the initial application, lenders may offer a pre-approval, which provides an estimate of the loan amount and terms a borrower qualifies for. This step offers a useful indication of eligibility and potential interest rates.

Following application submission, the lender initiates the appraisal and underwriting stages. An appraisal determines the property’s current market value for calculating the loan-to-value (LTV) ratio. Concurrently, the underwriting team reviews all submitted financial documents, credit history, and the appraisal report to assess risk and decide on loan approval. This ensures the borrower meets all lending criteria.

If the loan is approved, the process moves to the closing phase. Before closing, borrowers receive a Closing Disclosure, which details all final loan terms, costs, and fees. This document must be provided at least three business days before closing, allowing time for review. At closing, the borrower signs numerous legal documents, including the new promissory note and mortgage or deed of trust, officially replacing the old loan with the new fixed-rate mortgage.

After closing, there is a rescission period, three business days, to cancel the refinance transaction. Once this period expires, the new loan is funded, and the previous ARM is paid off. The lender then establishes the new loan for servicing, including payment schedules and, if applicable, an escrow account for property taxes and homeowners insurance.

Available Fixed-Rate Mortgage Products

When refinancing an Adjustable-Rate Mortgage (ARM) to a fixed-rate loan, borrowers can choose from several common fixed-rate mortgage products, each with distinct characteristics. The 30-year fixed-rate mortgage is a popular option, offering the lowest monthly payments due to the extended repayment period. This loan provides payment stability over three decades, making budgeting straightforward as the principal and interest portion of the payment remains constant.

A 15-year fixed-rate mortgage offers a shorter repayment term, resulting in a lower interest rate compared to a 30-year loan. While the monthly payments are higher, borrowers build equity more quickly and pay significantly less interest over the life of the loan. This option appeals to those who prioritize faster debt repayment and long-term interest savings.

Government-backed fixed-rate loans from the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) provide alternative options. FHA loans feature lower credit score requirements, making them accessible to more borrowers. VA loans are designed for eligible service members, veterans, and surviving spouses, offering competitive rates and requiring no down payment or mortgage insurance. These programs offer fixed rates with tailored benefits.

Conventional fixed-rate loans are another primary category, offered by banks, credit unions, and other financial institutions. These loans adhere to specific guidelines, requiring higher credit scores and down payments than some government-backed options. Conventional loans can be conforming, meeting loan limits set by Fannie Mae and Freddie Mac, or non-conforming, such as jumbo loans, exceeding these limits and having more stringent qualification criteria.