Is An Adjustable Rate Mortgage Right for You?
An adjustable rate mortgage (ARM for short) is a type of mortgage refinancing loan whose interest rate and subsequent payments will adjust over time depending on several variables. In almost all cases, the ARM rate will increase dramatically, though there is a cap or maximum limit on just how high it can go.
Though an adjustable rate mortgage can be a good option for those with lower credit ratings, they’re not without problems and you should find out everything you can before making a final decision as to whether an adjustable rate mortgage is right for you.
The interest rate on an adjustable rate mortgage refinance loan is variable. ARMs are linked to one of several economic indices, including the Prime Index. As the index increases or decreases, mortgage interest rates will vary. The rates fluctuate due to cost increases to the lender, which the lender passes on to the borrower.
In the event of a significant change in the chosen index, the borrower is protected by a clause in their ARM commitment, which places a cap on the amount of interest rate increases within a certain period of time. This limitation placed on the interest rate, once that cap is reached, will prevent further increases for the remainder of that time period. This is one of the benefits of the adjustable rate mortgage-refinancing loan.
When used as part of a hybrid mortgage, an adjustable rate mortgage is more appealing. A hybrid mortgage can begin with a fixed or an adjustable rate, which remain intact for two years. After two years the rate can become variable (or vice versa). A fixed rate is preferable at the onset of the loan in order to take full advantage of introductory rates that are lower than the adjustable rate.
The credit score of a potential buyer is one of the major factors in the lender’s decision on interest rates offered on an adjustable rate mortgage refinance. The amount of equity in your home can be your saving grace if you have a low credit score - the more equity you have, the lower the mortgage interest rates will be that are available.
Potential homebuyers with bad credit will often be directed toward an ARM. Though it is possible to buy a home when you have poor credit, you need to know up front that your interest rate is going to be higher - sometimes significantly so - than the average.
An additional consideration highlights bad credit. Low scores may disqualify you for a hybrid loan, which means that interest rates may not be fixed during the loan duration due to the increased risk on the part of the lender (mortgage company). Those desperately seeking a mortgage-refinancing loan may have gotten off to a rocky start financially; an adjustable rate mortgage is worth looking into.
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