Why refinance an ARM?

An ARM gives a lower introductory rate but exposes you to future resets. Homeowners refinance to:

  • Lock a fixed rate for payment stability.
  • Lower the current interest rate and monthly payment.
  • Shorten or extend the loan term to meet financial goals.
  • Remove private mortgage insurance (PMI) when equity has grown.

Key costs to include

When comparing offers, include all upfront and recurring costs:

  • Closing costs (appraisal, title, recording): typically 2–5% of loan amount. (CFPB: consumerfinance.gov)
  • Discount points (each point = 1% of loan amount to buy down rate).
  • Prepayment penalties on your current ARM (if any).
  • Escrow, lender fees, and possible mortgage insurance changes.

Break-even calculation — exact, simple formula

Break-even months = Total refinancing costs / Monthly payment savings

Example 1 (quick math):

  • Remaining balance: $300,000
  • Closing costs: 3% = $9,000
  • Monthly payment drop after refinance: $200

Break-even = 9,000 ÷ 200 = 45 months (3.75 years).

Example 2 (18-month break-even example):

  • Closing costs: $5,400
  • Monthly savings: $300

Break-even = 5,400 ÷ 300 = 18 months.

Use this to decide: if you plan to move or sell before the break-even date, refinancing may not be worth it.

Rules of thumb and timing

  • Rule of thumb: consider refinancing when the new rate is at least 0.5% (50 basis points) below your current rate, but verify with a break-even calculation. Market conditions, remaining fixed/adjustable period, and your time horizon matter more than a single rule. (Freddie Mac, CFPB)
  • Refinance before a scheduled adjustment that will raise your rate — but allow time to collect documentation and lock a rate.
  • If you expect to move within the break-even period, refinancing is often not cost-effective.

Practical step‑by‑step checklist

  1. Gather loan details: current rate, remaining balance, time until next adjustment, and any prepayment penalties.
  2. Estimate closing costs (ask lenders for a Loan Estimate to compare accurately).
  3. Get quotes for a fixed-rate and for another ARM if that fits your plan.
  4. Calculate monthly payments and compute the break-even months.
  5. Check credit score and LTV (loan‑to‑value). Better scores and >20% equity increase chances of a low rate.
  6. Consider non-rate benefits: payment stability, shortened term, or removing PMI.

Watchouts and common mistakes

  • Failing to compare APRs: APR includes fees; a lower rate with high points may not save money.
  • Ignoring prepayment penalties or lender credits that shift upfront costs.
  • Reborrowing more principal (cash‑out) can raise rates and lengthen break-even.
  • Overlooking taxes and insurance changes that affect escrow and monthly costs.

Tools and resources

When refinancing may make the most sense

  • You’re approaching an ARM reset that would significantly raise payments.
  • You can lock a lower fixed rate with a reasonable break-even time compared to your ownership horizon.
  • You’ve built enough equity to avoid PMI and qualify for better rates.

Final checklist before you sign

  • Confirm no prepayment penalty on your existing ARM.
  • Review the Loan Estimate and Closing Disclosure carefully for hidden fees.
  • Recalculate break-even using exact lender fees and your projected monthly savings.

Disclaimer

This article is educational and does not replace personalized financial or tax advice. Check current rates and loan terms with lenders and consult a licensed financial advisor or housing counselor for decisions tailored to your situation. For general consumer guidance on mortgages, see the CFPB.

Sources