Adjustable rate mortgages (ARMs) are one of the most popular options for home mortgages and refinancing. Many homeowners don’t fully understand the concept of an ARM and therefore may be a little hesitant to pursue this type of mortgage. This is a shame because in some cases, an ARM or hybrid mortgage may be the best mortgage solution for homeowners who are refinancing. This article will focus on explaining the concept of an ARM, explaining the circumstances in which an ARM is the best solution, debunking the most popular misconceptions about ARMs, and explaining how those with bad credit can benefit from an ARM. By the end of this article, the reader should have a better understanding of ARM and should be inspired to research this refinancing solution further.
What is an ARM?
ARM is an acronym for Adjustable Rate Mortgage. This means that the interest rate associated with a mortgage is not fixed. Instead, it is tied to an index, such as the prime index, and may rise and fall as the underlying index rises and falls. The fact that interest rates are variable scares many homeowners away from further considering this option. However, there are security measures that can protect homeowners from rapid increases. Such safety measures are discussed in detail later in the article in the section on the biggest myths about ARMs. For now, however, homeowners just need to know that they won’t be subject to incredibly high interest jumps anytime soon.
The Biggest ARM Myth
The change in interest rates in ARMs is causing a lot of consternation for many homeowners. These homeowners envision rates breaking through the room over the life of their loan, causing their monthly payments to skyrocket. Fortunately for these homeowners, however, rapidly increasing interest rates may not have a significant impact on ARMs.
This is because most ARMs have a built-in provision that prevents interest rates from rising above a certain amount during a given time period. During that time period, state interest rates may rise significantly, but there is a cap on the amount of the rate increase for homeowners.
When do I want to adopt ARM?
One of the most ideal situations for an ARM is as part of a hybrid mortgage. Hybrid mortgages usually have one part that is fixed and one part that is adjustable. These types of mortgages may have a fixed rate for a set number of years and begin to change after this initial period. Alternatively, a hybrid loan may be variable for a number of years and then become fixed after this initial period.
Loans that begin with a fixed rate are usually desirable because the introductory rate is usually lower than the rate on a conventional fixed loan for a homeowner with a comparable credit rating. Homeowners may particularly like this option if they are paying off a smaller second mortgage and may pay off the loan in full before the end of the introductory period.
ARMs for people with bad credit
ARMs are also useful for helping those with bad credit buy a home for the first time. A variety of loan options are available today, which makes it possible for even homeowners with bad credit to obtain a home loan. However, those with bad credit often get these loans on unfavorable terms, such as higher interest rates. In addition, lenders may only be able to offer ARMs to people with bad credit. when lenders lend money to homeowners with bad credit, they take a much greater risk. As a result, lenders often compensate for this increased risk by putting less favorable shackles on homeowners, such as using adjustable rate mortgages instead of fixed rates.