5-Year ARM Refinance Guide: Rates, Reset Rules & When to Switch

Quick Answer: An ARM refinance makes sense in two situations. Refinancing into a 5-year adjustable-rate mortgage (ARM) works when its rate sits well below a 30-year fixed mortgage and you expect to be out of the loan within about five years. If you already have an ARM and its reset rate would land above today’s fixed mortgage rates, refinance into a fixed-rate mortgage before the first adjustment.

Homeowners are thinking about ARMs right now for very different reasons. Some took out a 5-year ARM in 2021, when mortgage rates were near historic lows, and are now facing their first rate adjustment. That can be a stressful change when you’re used to a much lower payment.

Others are in the opposite position. They have a fixed-rate mortgage around 7% and are seeing 5-year ARM rates that are roughly three-quarters of a percentage point lower. For them, an ARM may look like a way to lower their monthly payment, at least for the next few years.

Both situations come down to what the ARM costs while the rate is fixed and what your payment could do once the rate adjusts. The question that settles it, though, is how long you expect to keep the loan.

Mechanically, it's the same as any mortgage refinance. You apply for a new loan, it pays off your current loan, and you come out with a new rate, a new loan term, and new monthly payments. The only thing that makes it an ARM refinance is that an adjustable-rate mortgage sits on one side of the trade, and our ARM program page covers how that product works.

Refinancing out of an ARM usually means moving into a fixed-rate mortgage so the monthly payments stop moving. Refinancing into one means giving up a fixed interest rate for a lower initial rate that holds through an introductory period of a set number of years and then adjusts. Most of these are straight rate-and-term refinances. Pulling cash out tightens the loan terms, and in Texas a cash-out refinance on a homestead can't push total debt past 80% of the home's value (here's how that rule works).

ARM refinance requirements

Qualifying for an ARM refinance looks a lot like it did for your current loan. Expect a lender to check:

• Your credit score, with most conventional lenders wanting 620 or better and the best pricing going to excellent credit above 740
• Your debt-to-income ratio, which needs to fit the program you're refinancing into
• Your home equity, since the new loan amount has to fit under the program's loan-to-value limit
• About two years of steady employment history and income you can document
• Your current mortgage statements, plus the ARM note itself if you're refinancing out of one

Bring the note even if nobody asks for it. It lists your index, margin, and caps, which is everything you need to know what the loan will do next.

ARM refinance vs. fixed-rate refinance

With a fixed-rate mortgage, refinancing is the only way to capture a lower interest rate, and every refinance costs money. With an ARM, a falling index does some of that work for you.

It can be, because the discount is real right now. The Mortgage Bankers Association’s weekly survey shows that 5-year ARM rates have been running about three-quarters of a percentage point to a full point below 30-year fixed rates this month. On a $400,000 mortgage, that difference can add up to meaningful savings during the ARM’s initial fixed-rate period.

Rates are national survey averages for illustration, not a quote; your interest rate and annual percentage rate (APR) depend on your own credit and home equity, and on whether you buy points.

The balance row counts as much as the payment row. At a lower interest rate, more of each monthly payment goes to principal, so the ARM borrower owes less when the fixed period ends even though they paid less every month. An amortization schedule shows it month by month.

Whether that adds up to a good deal depends entirely on what happens after year five.

What happens when the fixed period ends

Once the ARM’s initial fixed-rate period is over, your interest rate can change. The new rate is based on a market index plus a set margin from your lender.

For most conforming ARMs, that index is the 30-day average of the Secured Overnight Financing Rate (SOFR). On September 22, it was around 3.68%. Add a typical 2.75% lender margin, and the fully indexed rate comes to about 6.375%.

That doesn’t necessarily mean your rate will jump straight to 6.375%. Your loan’s adjustment caps can limit how much the rate can change at each adjustment.

The standard 5/6 ARM can move 2 points at its first adjustment and a point at a time after that, with an adjustment period of six months. The lifetime cap keeps the rate within 5 points of where it started for the life of the loan. Older 5/1 ARMs reset once a year, usually with 2/2/5 caps, and your note says which one you have.

Figures assume the $400,000, 6.23% 5/6 ARM above with a 2.75% margin and standard 2/1/5 caps.

Look at the second row, because it's the unusual part of today's market. The fully indexed rate sits within a fraction of a point of what lenders are quoting on new 5-year ARMs, so there's no teaser to burn off; if SOFR holds, the first adjustment barely moves the monthly payment. The savings come from the gap between short- and long-term rates.

Read the bottom two rows as a stress test, not a forecast. Payments like those would break some budgets, and for those borrowers the ARM's early savings aren't worth the exposure.

5/1 vs. 5/6: which ARM do you have?

Your note names the loan, and the two numbers in that name tell you how it works. The first is how many years your rate stays fixed, and the second is how often the rate adjusts after that.

A 5/1 ARM holds its rate for five years and then adjusts once a year. On a 5/6 ARM, the 6 means six months, so after the same five fixed years the rate can change twice a year.

Odds are a conforming 5-year ARM from 2021 or later is a 5/6. Fannie Mae and Freddie Mac stopped buying LIBOR-based ARMs at the end of 2020, and the SOFR-based loans that replaced them adjust every six months. Fannie Mae did continue purchasing some Treasury-indexed ARMs into mid-2021.

There are still some 5/1 ARMs out there, particularly with jumbo loans and certain bank portfolio products. FHA ARMs also adjust annually. And if you have an older LIBOR-based ARM, your loan was generally moved to a SOFR-based index when LIBOR was phased out in 2023.

How lenders qualify you on a 5-year ARM

Your lender probably won’t qualify you at the low introductory rate you see advertised, which surprises plenty of homeowners shopping for an ARM.

For ARMs with a fixed period of five years or less, Fannie Mae’s guidelines generally require lenders to look at the highest rate the loan could reach during those first five years. In practice, that often means taking the starting rate and adding the loan’s 2-point initial adjustment cap.

So the income a lender wants to see on a 5-year ARM is based on a bigger monthly payment than the one you’ll make at first. A longer-term ARM with a slightly higher starting rate can even be easier to qualify for.

You're trading lower monthly payments now for uncertainty later, and that trade works for some borrowers and badly for others.

The real test is one question: could you make the worst-case monthly payment in the table above without selling the house or draining savings? If the answer is yes and your timeline is short, the ARM's savings are real money. A no means you'd be betting your house that rising interest rates won't catch you, and a fixed-rate mortgage lets you skip that bet.

Closing costs belong in the math too. Refinancing a fixed-rate mortgage into an adjustable-rate mortgage only pays if the potential savings over the years you'll keep it clear what the new loan costs to get.

What if rates fall instead?

When interest rates drop, your rate can fall at the next adjustment without a new application or closing costs, because the fully indexed rate follows the index down the same way it follows it up. On Fannie Mae ARMs the margin itself is the floor, so the rate won't drop below it however low the index goes. That's a real argument for riding out the reset if you think rates are headed down.

Would a 7- or 10-year ARM fit better?

It can, if five years feels like too short a runway. A 7- or 10-year ARM buys you extra years of rate stability and a predictable payment, usually for a slightly higher starting rate.

Another potential advantage is that 7- and 10-year ARMs are generally qualified using the starting rate, rather than a higher qualifying rate. And the difference between the starting rate on a 5-year ARM and a 7- or 10-year ARM is often fairly small.

The tradeoff comes later, when the rate starts adjusting. Most conforming 7- and 10-year ARMs have 5/1/5 caps, which means the rate could increase by as much as 5 percentage points at the first adjustment, subject to the loan terms.

If you think you’ll be in the home for seven or eight years, paying a little more upfront for several additional years of a fixed rate may be worth considering.

Your servicer has to warn you before the first change. Federal rules require a notice 210 to 240 days before the first payment at the new interest rate, and it has to spell out the new rate, the new payment, your caps, and alternatives including refinancing. That's plenty of runway, since a typical refinance closes in about a month.

The decision itself comes down to one comparison: where will your ARM's rate sit over the next year or two, and how does that stack up against the fixed rate you could lock today? If the reset lands above today's fixed-rate mortgage rates, refinancing to a fixed-rate loan protects you. A reset that lands below them, because interest rates have fallen, means there's no rush.

The 2021 ARMs resetting now

The 2021 vintage is the interesting case. Those loans started near 2.75%, the Freddie Mac survey average for a 5-year adjustable-rate mortgage in early January 2021, and a standard 5/6 from that stretch hits its first adjustment this year. Check your note, since some loans from that year use a Treasury index and adjust yearly. The caps turn the reset into a staircase, and if SOFR holds, the table below shows each step.

Payments are principal and interest; the refinance row re-amortizes the roughly $354,000 balance over a fresh 30 years.

So a borrower in that spot doesn't need to refinance the week the letter arrives. The capped steps run below today's fixed-rate mortgage rates for the first year, about $2,700 cheaper than refinancing right away, and if SOFR holds, the loan settles a little under today's 30-year average anyway.

That changes what a refinance buys you. Locking a fixed interest rate here buys certainty rather than savings, and certainty has real value, because the caps still let this loan climb as high as 7.75% if SOFR jumps. If a monthly payment near $2,650 would strain your budget, lock the fixed rate. Otherwise, riding the capped steps for the first year is the cheaper path, as long as you watch market conditions, since fixed rates can rise while you wait.

FHA and VA borrowers have a shortcut

ARM borrowers with FHA loans or VA loans may not need a full refinance at all. The Federal Housing Administration's streamline refinance and the Department of Veterans Affairs' IRRRL both let you move from an ARM loan into a fixed-rate mortgage with lighter paperwork, often without a new appraisal. The VA goes a step further. An IRRRL normally has to lower your rate, but federal law carves out ARM-to-fixed refinances, so a veteran can lock a fixed rate even if it's higher than the ARM's current interest rate.

Jumbo ARMs have their own exits

Jumbo loans often stay with the bank that made them instead of being sold to Fannie Mae or Freddie Mac, so the bank sets its own terms. Rate caps and margins vary from one jumbo ARM to the next, and so does how often the rate adjusts, with annual-adjusting 5/1 and 7/1 ARMs still common in the jumbo market.

The conforming loan limit has moved in your favor. For a single-family home in most of the country it’s $832,750 this year, up from $548,250 in 2021. A loan that counted as jumbo when you took it may fit under the limit today, especially after five years of payments, and refinancing into a conforming loan can come with better pricing.

Above the limit, you’re looking at another jumbo loan, fixed-rate or adjustable. There, your relationship with the bank can move the rate you’re offered more than it would on a conforming loan, especially if you keep significant deposits or other accounts there.

1. Pull your ARM note and find the index, margin, caps, and the date of the first adjustment.
2. Work out your likely reset rate, both at the first cap and at today's fully indexed rate.
3. Get quotes on a fixed-rate mortgage and, if you're staying put a while, on a new ARM loan too.
4. Compare total cost over the years you expect to keep the loan, including closing costs; our refinance calculator handles this.
5. Lock your rate once the numbers work, then order the appraisal if the lender needs one.
6. Close on the new mortgage, which pays off the original loan.

A broker can run steps three and four across several lenders at once, and with ARMs that pays off, because margins vary more from lender to lender than fixed rates do.

Expect several thousand dollars in closing costs. The CFPB's latest review of mortgage data put median total loan costs on a refinance at $7,329 for 2023, discount points included. Most of the rest is lender and title charges plus appraisal fees. Buying discount points lowers the interest rate for more cash up front, while a lender credit does the reverse.

The exit is cheaper than people think. Federal rules only allow prepayment penalties on fixed-rate qualified mortgages, so a standard consumer ARM can't carry one, and you can refinance out whenever the numbers work. Run your break-even through our refinance break-even calculator, and put the two loans side by side in our ARM vs. fixed calculator, which also shows total interest over the loan term, before you commit.