An adjustable rate mortgage (ARM) is one of the most common 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.
An ARM is an acronym for an adjustable rate mortgage. This means the interest
rate linked with the mortgage is not fixed. Instead it is tied to an index such
as the prime index and may increase and decrease 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,
opportunely 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 considerably 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 opens with a fixed rate is usually desirable because the
introductory rate is normally 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 beneficial for assisting those with bad credit in
purchasing a home for the first time. There are an assortment 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.