Why is this coming up now?
Per ICE's October Mortgage Monitor, there are now more active first-lien adjustable-rate mortgages than at any point in the last five and a half years, and more of them are scheduled to reach their first adjustment next year than this year. ICE also found ARMs drawing their biggest share of new rate locks in nearly four years as fixed rates climbed. Meanwhile, Mortgage News Daily reported that rates finished the week of October 12 sharply lower after sitting near their highest levels in almost three years. So a lot of homeowners are asking the same question at the same time: when my ARM adjusts, what should I do about it?
How does one refinance handle both the ARM and the debt?
A cash-out refinance replaces your current mortgage with a new, larger one. The new loan pays off the ARM in full. The difference between the new loan and what you owed comes to you as cash, and in many cases the closing can send that money straight to your card companies, your car lender, or whoever holds your other balances.
Two problems, one closing. You walk away with one mortgage, one due date, and zero balances on the accounts you paid off. If a fixed-rate structure fits your plans, you also stop wondering what your housing payment will look like at the next adjustment.
Why not just refinance the ARM and leave the cards alone?
You can, and for some people that is the right call. But if you are going through a refinance anyway, the appraisal, the paperwork, and the closing are already happening. Folding the other balances into the same loan means you only do that work once. For most homeowners I talk to who carry both an ARM and revolving balances, the combined move is the one that changes the monthly picture the most.
When should I start looking?
Earlier than most people think. Your loan documents and your servicer's notices tell you when the first adjustment is scheduled, and servicers are generally required to send an advance notice before an initial adjustment. You do not have to wait for that letter. Starting the conversation a few months ahead gives you room to shop lenders, order the appraisal, and close on your timeline instead of the calendar's.
- Find your adjustment date in your note or your most recent servicer statement.
- Pull your current balances on every card and loan you might want to pay off.
- Keep every account current while the loan is in process, even the ones about to be paid off.
- Avoid opening new credit until the new loan funds.
What does a lender look at?
The same things as any cash-out refinance: how much equity you have, your credit, your income, and how the new payment fits against your other obligations once the balances are paid off. Paying off the cards at closing can help that last piece, because those monthly obligations come off your file. Programs differ on how much of your home's value you can borrow against and on credit requirements, which is why it helps to compare more than one lender. Texas homes have their own cash-out rules, which I cover on the Texas page.
What does it cost?
A cash-out refinance has closing costs, like any mortgage. Those can include lender fees, an appraisal, title and escrow, and recording fees. I put the full picture in front of you before you decide, side by side with what you have today, so you can weigh the cost against the ARM you are leaving and the balances you are clearing. And because the new loan is secured by your home, I run the full numbers with you before you sign anything.
What does it look like in real life?
Picture a homeowner who took an ARM a few years ago because it made the purchase work. The house has gained value since then. They also picked up balances on two cards and a car loan along the way. The first adjustment is on the calendar for next year. We look at the equity, the income, and the credit, and find a program where one cash-out refinance pays off the ARM, the two cards, and the car loan in a single closing. They leave with one mortgage on a structure they chose, and three zero balances.
Where I come in
I'm Danny Granger, NMLS #920614, sponsored by Lumin Lending, NMLS #2716106. I'm licensed in 18 states and I compare over 100 wholesale lenders, so your file is matched to the program that fits instead of whatever one bank offers. Start with the cash-out refinance overview, see how much cash you may be able to take out with the cash-out calculator, or compare your options in debt consolidation: cash-out vs second mortgage vs HELOC vs HEI. Knowledge is power. Tell me when your ARM adjusts and what you owe, and I'll show you your options.
