ARM to Fixed Rate Mortgage Conversion FAQs

1. When should I convert my ARM to a fixed rate mortgage before the first rate adjustment?

Consider converting when the expected ARM adjustment could increase your monthly payment beyond your comfort level, or when securing a fixed rate aligns better with your long term plans. Compare the available fixed rate, projected ARM adjustment, closing costs, and expected time in the property before deciding. Refinancing before the adjustment is not automatically cheaper.

2. Is it better to convert an ARM to a fixed mortgage before or after the first rate reset?

Converting before the first reset may help you secure predictable payments before an adjustment increases your interest rate. However, waiting may be beneficial if the adjusted ARM rate remains lower than the available fixed rate. Compare the projected adjusted payment with the new fixed mortgage payment, including refinancing costs and the remaining loan term.

3. How much should my ARM interest rate increase before refinancing into a fixed rate mortgage?

There is no universal interest rate increase that makes refinancing worthwhile. The decision depends on the difference between your current ARM rate, projected adjusted rate, available fixed rate, remaining principal, and closing costs. Calculate the total expected interest under both options rather than using a specific rate increase as the deciding factor.

4. Can I convert my ARM to a fixed rate mortgage without refinancing?

Possibly, if your original mortgage agreement includes a fixed rate conversion option. This contractual feature may allow you to convert the ARM under specified conditions without obtaining a completely new refinance loan. The conversion rate, eligibility window, fees, and available terms depend on your original loan documents. Not all ARMs include this feature.

5. What is the difference between an ARM conversion option and refinancing into a fixed rate mortgage?

An ARM conversion option is a feature written into certain mortgage agreements that allows the borrower to change to a fixed rate under specified terms. Refinancing replaces the existing mortgage with a new mortgage. A conversion may have different documentation, pricing, and fee requirements, while refinancing involves a new underwriting and closing process.

6. How do I calculate whether refinancing my ARM into a fixed rate mortgage will save money?

Compare the total projected cost of keeping the ARM against the cost of the proposed fixed rate mortgage over the same holding period. Include monthly principal and interest payments, expected ARM adjustments, closing costs, points, and remaining loan balances. The difference between the two projected costs provides a more useful comparison than monthly payment savings alone.

7. How long will it take to recover the closing costs when converting an ARM to a fixed mortgage?

A basic break even calculation divides the total refinance costs by the monthly payment savings. For example, if refinancing costs $6,000 and saves $150 per month, the simple break even period is 40 months. This calculation should be adjusted for changes in loan term, principal balance, interest costs, and the time you expect to remain in the property.

8. Should I refinance my ARM if the new fixed rate is higher than my current introductory rate?

Not necessarily. Your introductory ARM rate may be lower because it applies only during the initial fixed period. The more meaningful comparison is between the new fixed rate and the ARM's expected rate after adjustment. Consider how much the ARM could increase, its contractual caps, and the cost of refinancing before making a decision.

9. Is converting a 5/1 ARM to a fixed mortgage worthwhile when the first adjustment is approaching?

It can be worthwhile if the expected adjusted payment is substantially higher or you want predictable payments for the remaining ownership period. However, if the projected adjusted rate is competitive and you plan to sell soon, keeping the ARM may be less expensive. Compare the remaining five year or longer ownership costs before refinancing.

10. Should I convert a 7/1 ARM into a fixed mortgage if I plan to stay in my home for another 15 years?

A fixed rate mortgage may provide greater payment certainty when you expect to remain in the property well beyond the ARM's introductory period. However, the financial benefit depends on the fixed rate available, expected ARM adjustments, refinancing costs, and remaining mortgage term. Evaluate the long term interest expense under multiple ARM rate scenarios.

11. Can I refinance my ARM into a fixed rate mortgage if my home value has decreased?

Potentially. A lower property value can reduce your equity and increase the loan to value ratio, which may limit refinance options. Certain programs may allow refinancing with limited equity, depending on eligibility and lender participation. Your credit, payment history, existing loan type, and current property value will influence the available options.

12. Can I convert my ARM to a fixed rate mortgage if my credit score has declined?

Possibly, but a lower credit score may affect the interest rate, available loan programs, and approval decision. A contractual conversion option may have different credit requirements from a new refinance. If refinancing, lenders generally review your current credit profile, income, liabilities, and property value.

13. Does converting an ARM to a fixed mortgage restart my 30 year repayment period?

It can if you refinance into a new 30 year mortgage, but you are not required to choose that term. You may be able to refinance into a shorter term that is closer to your remaining repayment period. Extending the term can reduce the monthly payment while increasing total interest costs over time.

14. Can I convert an ARM to a fixed rate mortgage if I have already paid off a significant portion of the principal?

Yes. A lower outstanding balance may improve your loan to value ratio and reduce the amount you need to refinance. However, the decision should also account for the interest already paid, remaining repayment period, new closing costs, and the potential interest savings from switching to a fixed rate.

15. What happens to my remaining ARM balance when I refinance into a fixed rate mortgage?

The existing ARM balance is generally paid off using proceeds from the new fixed rate mortgage. The new loan begins with its own principal balance, interest rate, repayment schedule, and closing costs. If you finance eligible refinance costs into the new loan, the amount borrowed may be higher than your previous mortgage payoff.

16. Can I refinance my ARM into a fixed mortgage if the next rate adjustment will reach the lifetime cap?

Yes, provided you meet the new mortgage's eligibility requirements. However, reaching the lifetime rate cap does not automatically mean refinancing will save money. Compare the maximum ARM payment with the proposed fixed payment, remaining interest expense, and refinancing costs. A fixed rate may still offer valuable payment stability even if it is not the lowest cost option.

17. Is it better to refinance an ARM into a 15 year fixed mortgage or a 30 year fixed mortgage?

A 15 year fixed mortgage generally has a higher monthly payment but can reduce total interest and help you repay the property sooner. A 30 year fixed mortgage generally provides a lower scheduled payment and more monthly cash flow flexibility. The right option depends on your income, outstanding balance, financial priorities, and ability to manage the repayment schedule.

18. Can I convert an ARM to a fixed mortgage and take cash out at the same time?

Potentially. A cash out refinance may allow eligible borrowers to replace their existing ARM with a new fixed rate mortgage while accessing available home equity. However, the new loan amount, loan to value ratio, credit, income, occupancy, and lender guidelines determine eligibility. Additional borrowing can increase the monthly payment and total interest expense.

19. What happens if fixed mortgage rates decrease after I convert my ARM?

Your fixed interest rate generally remains unchanged even when market mortgage rates decline. You may subsequently consider refinancing again if the potential savings justify the new closing costs and other expenses. Before converting, consider whether you value long term payment stability more than the possibility of benefiting from future ARM rate decreases.

20. How can I compare the total lifetime cost of keeping my ARM versus converting to a fixed mortgage?

Project both loan scenarios using the outstanding mortgage balance, remaining repayment term, current ARM rate, index, margin, adjustment frequency, and contractual rate caps. Include the proposed fixed rate, refinancing costs, and any changes to the repayment term. Comparing total interest, cumulative payments, and remaining principal across several holding periods can reveal which option is more cost effective. Merchants Home Lending can help evaluate these scenarios and identify a refinancing structure that aligns with your financial goals.

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