Re-Financing with an ARM
An adjustable rate
mortgage (ARM) is one of the most popular options available for both home
mortgages and re-financing. Many homeowners do not fully 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.
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What is an ARM?
An ARM is an acronym for
an adjustable rate mortgage. This means the interest rate associated 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 apprehensive. These
homeowners envision interest rates going through the room during their loan
term and resulting in their monthly payments skyrocketing. However, fortunately
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 rising more than a
certain amount during a specific time period. During this time the national
interest rate may rise significantly more but there is a cap on the amount the
homeowner’s interest rate will be raised.
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When is an ARM Desirable?
One of the most desirable
situations for an ARM is as a part of a hybrid mortgage. Hybrid mortgages
typically 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 begins
with a fixed rate is usually desirable because the introductory rate is
typically 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
helpful for assisting those with bad credit in purchasing a home for the first
time. There are a variety 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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