Your 2021 ARM Is Hitting Its First Reset. Refinancing Into Today's 7.24% Fixed Gets You About the Same Payment, Plus Closing Costs.

If you took out a five-year adjustable-rate mortgage in late 2021, your cheap rate is ending about now. Your payment is about to go up, and it’ll keep going up for 18 months.

Here’s the catch nobody puts in the headline: refinancing into a fixed rate today barely changes where you end up.

What’s happening to your rate

Freddie Mac’s weekly survey had the average 5/1 ARM between 2.37% and 2.56% from October through December 2021, with a 2.75% margin. By then Fannie Mae and Freddie Mac had stopped buying LIBOR ARMs, so the ARMs they bought were tied to SOFR, a short-term rate set in the overnight Treasury lending market.

The standard Fannie and Freddie SOFR ARM uses 2/1/5 caps. Your rate can jump 2 points at the first reset, then 1 point every six months, and never more than 5 points above where it started.

The rate your note is heading for is the index plus the margin. The 30-day average SOFR was about 3.87% in mid-October, up from about 3.65% in mid-September. Add 2.75% and round, and you get 6.625%.

The math on $300,000

Take a $300,000, 30-year ARM at 2.5%. Principal and interest has been $1,185 a month. After five years you owe about $264,226.

On a standard SOFR ARM, if the index holds where it is, the first reset takes you to 4.5% and $1,469. Six months later it’s 5.5% and $1,620. Six months after that, 6.5% and $1,777. Then the full 6.625%, and $1,796.

That’s real money. About $610 a month more than you’re used to.

Now price the escape hatch. A new 30-year fixed at 7.24%, Freddie Mac’s October 29 average, on that same $264,226 is $1,801 a month. That’s more than the ARM at every step. Then add closing costs, and five more years of payments, because the clock restarts at 30. Keep your original payoff date with a 25-year term and it’s $1,908.

Translation: the refinance doesn’t lower your payment. It buys insurance against SOFR climbing further. The ARM’s worst case is the 7.5% lifetime cap, under $1,940 a month in this example. Your ARM can also drop if SOFR drops. A fixed rate never does.

Our verdict: don’t refinance just because the reset letter showed up. If the higher payment doesn’t fit, a 7.24% fixed rate won’t make it fit either.

Do this now

Find the reset notice. Federal rules require your servicer to send it 210 to 240 days before your first payment at the new rate. If your first adjusted payment is due this winter, it should have arrived in the spring or summer. It lists your margin, your index, your caps and your new payment.

Check your note for the caps. Portfolio and jumbo ARMs from 2021 don’t always use 2/1/5. Your first jump could be bigger.

Run your own balance. Put your current balance and the new rate into our mortgage calculator. Then price a fixed loan against it with real quotes, including closing costs. Our refinancing guide walks through the break-even.

If the numbers say refinance, shop it. If they don’t, ride the ARM and watch the index. For how the caps work before you sign one, see our adjustable-rate guide.

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