Re Financing With An Arm

Re Financing With An Arm

Re-Financing with an​ ARM
An adjustable rate mortgage (ARM) is​ one of​ the most popular 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 .​
What is​ an​ ARM?
An ARM is​ an​ acronym for an​ adjustable rate mortgage .​
This means the interest rate associated with the mortgage is​ not fixed .​
Instead it​ is​ tied to​ an​ index such as​ the prime index and may rise and drop 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 room during their loan term and resulting in​ their monthly payments skyrocketing .​
However, fortunately 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 rising more than a​ certain amount during a​ specific time period .​
During this time the national interest rate may rise significantly 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 typically 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 begins with a​ fixed rate is​ usually desirable because the introductory rate is​ typically 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 helpful for assisting those with bad credit in​ purchasing a​ home for the first time .​
There are a​ variety 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 .​

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