What is an ARM? Re-Financing with an ARM
Adjustable Rate Mortgages (ARMs) have gained popularity among homeowners looking for new mortgages and refinancing options. However, many individuals remain uncertain about how ARMs work, which can lead to hesitation in considering this type of mortgage. This article aims to clarify the concept of ARMs, highlight scenarios where they can be advantageous, dispel common misconceptions, and discuss how those with less-than-perfect credit can benefit from them. By the end of this piece, readers should feel more informed about ARMs and motivated to explore this refinancing option further.
What is an ARM?
An ARM, or adjustable rate mortgage, features an interest rate that fluctuates over time rather than remaining fixed. This rate is typically linked to a financial index, such as the prime rate, which can increase or decrease based on market conditions. The interest rate variability can be intimidating for many homeowners, leading them to shy away from ARMs. However, it’s important to note that protective measures are in place to shield homeowners from drastic rate hikes. We will delve deeper into these safeguards later in the article. Still, for now, it’s essential to understand that homeowners are not at risk of facing sudden, exorbitant increases in their interest rates.
Debunking the Biggest Myth About ARMs
The adjustable nature of ARMs often leads to anxiety among potential borrowers, who fear that their interest rates will skyrocket during the life of the loan, resulting in unaffordable monthly payments. Fortunately, this concern is largely unfounded. Most ARMs include provisions that limit how much the interest rate can increase within a specific timeframe. Even if national interest rates rise significantly, these caps ensure that homeowners won’t experience overwhelming jumps in their mortgage payments.
When is an ARM a Good Choice?
ARMs can be particularly appealing when used as part of a hybrid mortgage. Hybrid mortgages combine fixed and adjustable components, often starting with a fixed interest rate for a predetermined period before transitioning to an adjustable rate. This initial fixed-rate phase typically offers lower rates than traditional fixed-rate mortgages, making it an attractive option for homeowners. This can be especially beneficial for those planning to pay off their mortgage before the adjustable period begins or managing a smaller second mortgage.
ARMs for Homebuyers with Bad Credit
ARMs can provide a viable pathway to homeownership for individuals with poor credit. While various loan options are available today, those with bad credit often face higher interest rates and less favourable terms. In many cases, lenders may only offer ARMs to these borrowers due to the increased risk involved. By opting for an ARM, individuals with less-than-ideal credit may find a more accessible route to securing a mortgage, even if it comes with an adjustable rate.
Conclusion
Adjustable Rate Mortgages can be valuable for homeowners, especially those considering refinancing. Homeowners can make informed decisions about their mortgage options by understanding how ARMs work, recognizing the myths surrounding them, and exploring their benefits—particularly for those with bad credit. If you’re contemplating refinancing, an ARM might be the solution you need to achieve your financial goals.