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Your Guide on How to Refinance a 7-Year ARM
If your 7-year Adjustable-Rate Mortgage (ARM) is nearing the end of its fixed period, consider refinancing to lock in a lower interest rate or secure more predictable monthly payments.
The answer is yes—refinancing a 7-year ARM is possible and can offer various financial benefits depending on your situation.
This guide explains how refinancing works, why it could be a smart move, and the steps to help you make an informed decision.
Start your application with MIDFLORIDA Credit Union.
How to refinance an ARM to a fixed-rate mortgage
One of the most popular refinancing options for homeowners with a 7-year ARM is switching to a Fixed-Rate Mortgage.
A Fixed-Rate Mortgage lets you lock in a stable interest rate for the remainder of your loan term, ensuring predictable monthly payments and reducing future uncertainty.
Here’s how the process works.
Evaluate your current loan and financial situation
Begin by assessing your current mortgage details, such as:
- The interest rate
- Outstanding loan balance
- Remaining time on the fixed-rate period
It’s also essential to assess your financial health, including your credit score, income, and debt-to-income (DTI) ratio.
Lenders will review and assess these details to determine your qualifications and the loan terms they can offer you.
You may qualify for more favorable terms if your financial situation has improved since taking out the ARM—such as higher income or a better credit score.
Compare current mortgage rates
Searching for current mortgage rates from different lenders is key to securing the best rate for your refinance.
Mortgage rates fluctuate with economic conditions, so timing your refinance when rates are low can yield long-term savings.
While Fixed-Rate Mortgages typically carry higher rates than ARMs, locking in a stable rate eliminates the risk of future increases once the adjustable period begins.
Choose your new loan term
Moving from an ARM to a fixed-rate mortgage means choosing a loan term that aligns with your financial objectives.
Common terms include 15- and 30-year mortgages. A 15-year mortgage accelerates equity building and loan payoff but has higher monthly payments.
In contrast, a 30-year mortgage spreads payments out, lowering your monthly obligations but increasing the total interest paid.
Apply for the refinance
After selecting a loan, the next step is to apply. You’ll need to provide documentation. This can include:
- Proof of income
- Copies of previous years' tax returns
- Information and details about your current mortgage
During this process, the lender will also order a home appraisal to determine its current value, which will affect the loan-to-value ratio and the interest rate, affecting the loan-to-value (LTV) ratio and interest rate.
Close on the refinance
After approval, you’ll proceed to the closing stage. You’ll sign the necessary documents at this point, and the lender will use the new loan to pay off your current mortgage.
You’ll also cover closing costs, usually between 2% to 5% of the loan amount. Some lenders offer "no-closing-cost" options, allowing you to roll these fees into the loan.
Understanding adjustable-rate mortgage caps
With a 7-year ARM, it’s important to understand the caps on rate adjustments after the fixed period.
ARMs typically have three caps:
- Initial adjustment cap: Limits the rate increase after the fixed period
- Subsequent adjustment cap: Controls annual, or other adjustment period, variable rate changes
- Lifetime cap: Sets the maximum rate over the loan term
Knowing these caps helps you assess the risk of future rate hikes and determine if refinancing before the first adjustment is a smart decision.
Reasons to consider refinancing your ARM
Refinancing your 7-year ARM can be a smart financial move for several reasons.
Locking in a stable interest rate
One of the most compelling reasons to refinance is to secure a fixed interest rate.
After the initial fixed period of your ARM ends, the interest rate becomes variable and may change at stated intervals based on market conditions, potentially increasing your monthly payments.
Refinancing into a fixed-rate loan protects you from rising rates and allows you to enjoy predictable payments.
Taking advantage of lower interest rates
If current mortgage interest rates are lower than when you got your ARM, refinancing can help you secure a better rate and lower monthly payments.
Even a small rate reduction can lead to significant savings over the loan’s term. However, consider the upfront closing costs against potential long-term savings.
Building home equity faster
If you're ready for higher monthly payments, refinancing to a shorter-term loan, like a 15-year fixed-rate mortgage, allows you to build equity faster by paying off your home sooner and reducing overall interest.
Refinancing costs and break-even point
When refinancing, consider costs like application, appraisal, title search, and closing fees, typically 2% to 5% of the loan.
Calculate the break-even point, or how long it will take for savings from lower payments to cover these costs.
For example, saving $150 monthly on $3,000 in closing costs means a 20-month break-even. Refinancing is likely a smart move if you stay in the home longer.
Rate-and-term refinance vs. cash-out refinance
When refinancing your 7-year ARM, choose between a rate-and-term or cash-out refinance.
A rate-and-term refinance replaces your loan with new terms, like a fixed rate or longer term, ideal for securing stability or lowering payments.
A cash-out refinance lets you borrow against home equity, which is useful for debt consolidation or home improvements, but it increases the loan amount and may raise monthly payments.
When is the right time to refinance a 7-year ARM?
Deciding when to refinance depends on your financial goals and market conditions. Consider refinancing if:
- Interest rates rise: Lock in a fixed rate before your ARM adjusts to higher rates.
- Your financial situation has improved: You may qualify for better terms if your income, credit score, or overall financial profile has strengthened.
- You plan to stay in your home long-term: Refinancing makes more sense if you remain there beyond the ARM’s fixed period.
On the other hand, if you plan to move soon or if rates aren’t favorable, it may be worth waiting to refinance.
Start your refinance with MIDFLORIDA
Refinancing your 7-year ARM can provide financial security, lower monthly payments, or help you build equity faster.
Whether you want to lock in a fixed rate or take advantage of lower rates, refinancing can be a sound strategy for homeowners looking for long-term stability.
To explore your refinancing options, start your application with MIDFLORIDA today.
