Real Estate Innovation

Adjustable Rate Mortgage: A Consolidation Option

With an adjustable rate mortgage (ARM for short) which is a type of mortgage refinancing loan, the interest rate and subsequent payments will adjust over time depending on several factors. In most cases, the ARM rate will increase dramatically, though there is a maximum limit on just how much it can increase.

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. ARMs are linked to one of several economic indices, including the Prime Index. As the specific index increases or decreases, your mortgage interest rate will fluctuate. The rates vary because the cost to the lender varies, and the lender in turn passes the additional costs on to you, the borrower.

In the event of a dramatic change in the index, there is a clause in the ARM commitment which protects the borrower. This clause places a cap on the amount the interest rate can increase over 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 even more appealing. A hybrid mortgage can begin at either a fixed or adjustable rate and remain that way for two years at which time 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 will generally be lower than the adjustable rate would start at.

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.