Re-Financing with an ARM
An adjustable rate mortgage (ARM) is one of the most prevalent
options available for both home mortgages and re-financing. Many
homeowners do not completely understand the concept of an ARM and as
a result may be somewhat hesitant to pursue this type of a mortgage.
This is a shame because there are some situations in which an ARM or
a hybrid mortgage can be the best mortgage solution for a homeowner
who is in the process of re-financing. This article will focus on
explaining the concept of an ARM, explaining situations where it is
the best solution, debunking the most popular misconception
regarding ARMs and explaining how those with bad credit can benefit
from an ARM. At the conclusion of this article the reader should
have a better understanding of ARMs and should be inspired to
investigate this re-financing option further.
An ARM is an acronym for an adjustable rate mortgage. This means the
interest rate connected with the mortgage is not fixed. Instead it
is tied to an index such as the prime index and may rise and drop as
the associated index rises and drops. The fact that interest rate is
variable scares away many homeowners from considering this option
further. However, there are certain safety measures in place which
protect the homeowner from rapid increases. This safety measure will
be discussed in greater detail later in the article on the section
on the biggest myth regarding an ARM. However, for now homeowners
should simply be aware that they would not be subjected to
incredibly high interest jumps during a short period of time.
The Biggest ARM Myth
The variability of the interest rate in an ARM makes many homeowners
feel very nervous. These homeowners envision interest rates going
through the roof during their loan term and resulting in their
monthly payments skyrocketing. However, luckily for these
homeowners, rapidly increasing interest rates may not have a
significant effect on ARMs.
This is because most ARMs have a built in clause which prevents the
interest rate from growing more than a certain amount during a
specific time period. During this time the national interest rate
may rise extensively more but there is a cap on the amount the
homeowner’s interest rate will be raised.
When is an ARM Desirable?
One of the most sought-after situations for an ARM is as a part of a
hybrid mortgage. Hybrid mortgages usually have one component which
is fixed and one component which is adjustable. These types of
mortgages may have a fixed rate for a set number of years begin to
vary after this initial period. Alternately a hybrid loan may be
variable for a number of years and then become fixed after this
initial period.
The loan which starts with a fixed rate is usually desirable because
the introductory rate is usually lower than the rate offered on
traditional fixed loans for homeowners with comparable credit
ratings. Homeowners may particularly like this option if they are
repaying a smaller second mortgage and may be able to repay the loan
in full before the introductory period ends.
ARMs for Those with Bad Credit
ARMs can also be very accommodating for assisting those with bad
credit in purchasing a home for the first time. There are a range of
loan options available today which makes it possible for even
homeowners with poor credit to obtain a home loan. However, those
with bad credit are usually offered these loans with unfavorable
terms such as higher interest rates. Additionally, lenders may only
be able to offer those with poor credit an ARM. Lenders take a
significantly greater risk when they lend money to a homeowner with
bad credit. As a result the lenders usually compensate for this
increased risk by shackling the homeowner with less favorable such
as a mortgage with an adjustable rate as opposed to a fixed rate.
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