Re-Financing with an Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage (ARM) is one of the most common options
available for both home mortgages and re-financing. Many homeowners
do not wholly 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 related with the mortgage is not fixed. Instead it is
tied to an index such as the prime index and may go up and down 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 roof during their loan term and resulting in their
monthly payments skyrocketing. However, luckliy 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 increasing more than a certain amount during a
specific time period. During this time the national interest rate
may rise drastically 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 desirable situations for an ARM is as a part of a
hybrid mortgage. Hybrid mortgages generally 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 commences 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 an array
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.
ABOUT THE AUTHOR
Bob Schwartz, is a Certified Residential
Specialist, CA licensed real estate broker with
www.Brokerforyou.com. Bob
has over 27 years of residential real estate experience, authored a
number of published articles and served as an expert witness for
San Diego lawyers. You can contact
Bob via e-mail at bob@brokerforyou.com or visit his highly popular
San Diego real estate website at:
http://www.brokerforyou.com
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