Mortgage Refinancing With An Adjustable Rate Mortgage
Andrew McAllister
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.
An adjustable rate mortgage can be a good option for those with low credit ratings. ARM's are not without problems though. Learning everything you can about this type of loan is very important before making a final decision about refinancing with an adjustable rate mortgage.
The interest rate on an adjustable rate mortgage refinance loan is variable, in that it is tied to one of several economic indices, most of them Prime Index. As the specific index increases or decreases, your mortgage rate will follow suit. The rate varies because the cost to the lender varies, and the lender in turn will pass the additional costs on to you, 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 may be directed toward applying for ARM loans. Though it is possible to buy a home with a poor credit score, the interest rates will be much higher than average loans offered to consumers. There is usually a significant difference in the rates.
One additional consideration if I may, your bad credit means that you will not be eligible for a hybrid loan, meaning that your rate will not be fixed at any time due to the increased risk on the part of the lender (mortgage company). Still, for those who are desperately seeking a mortgage refinancing loan who may have gotten off to a rocky start financially, an adjustable rate mortgage is worth looking into.
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