Re-Financing with an ARM
The ARM home mortgage was taken advantage of by a great number of people over the years because of the lower payments it provided them when compared to a fixed rate mortgage. But when these mortgages started to adjust many home owners were having a hard time finding options for refinancing ARM mortgage loans.
An adjustable rate mortgage (ARM) is one of the most popular options available for a few house mortgages and re-financing. Many householders don’t fully understand the concept of an ARM and as a result perhaps somewhat hesitant to pursue this type of a mortgage. This is a shame as there are a few situations in which an ARM or a hybrid mortgage may be the best mortgage solution for a householder who’s in the process of re-financing. This article will focus on explaining the concept of an ARM, explaining situations where it’s the best solution, debunking the most popular misconception regarding ARMs and explaining how those with bad credit may benefit from an ARM. At the conclusion of this article the reader should have a better understanding of ARMs and should be inspired to enquire this re-financing option further.
What is an ARM?
An ARM is an acronym for an adjustable rate mortgage. This means the rate of interest associated with the mortgage isn’t fixed. Instead it’s tied to an index such as the prime index and may rise and drop as the associated index rises and drops. The fact that rate of interest is variable scares away many householders from considering this alternative further. However, there are certain safety measures in place which protect the householder 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 householders should simply be aware that they’d not be subjected to incredibly high interest jumps during a short time period.
The Biggest ARM Myth
The variability of the rate of interest in an ARM makes many householders feel very apprehensive. These householders envision rates of interest going through the room during their loan term and resulting in their every month payments skyrocketing. However, fortunately for these householders, rapidly increasing rates of interest may not have a significant effect on ARMs.
This is because most ARMs have a built in clause which prevents the rate of interest from rising more than a certain amount during a particular period of time. During this time the national rate of interest may rise significantly more but there’s a cap on the amount the homeowner’s interest rate will be raised.
When is an ARM Desirable?
One of the most suitable situations for an ARM is as a part of a hybrid mortgage. Hybrid mortgages normally 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 perhaps variable for a number of years and then become fixed after this initial period.
The loan which begins with a fixed rate is normally suitable as the introductory rate is normally lower than the rate offered on traditional fixed loans for householders with comparable credit ratings. Householders may particularly like this alternative if they’re refunding a smaller second mortgage and perhaps able to repay the loan fully before the introductory period ends.
ARMs for Those with Bad Credit
ARMs may also be very helpful for assisting those with bad credit in buying a home for the first time. There are a variety of loan alternatives available today which makes it possible for even householders with poor credit to obtain a home loan. However, those with bad credit are normally offered these loans with unfavorable terms such as higher rates of interest. Additionally, loaners may only be able to offer those with poor credit an ARM. Loaners take a significantly greater risk when they loan money to a householder with bad credit. As a result the lenders usually compensate for this increased risk by shackling the householder with less favorable such as a mortgage with an adjustable rate as opposed to a fixed rate.