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.
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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, 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 dramatic change in the chosen index, the borrower is generally protected by a clause in their ARM which places a limit on the amount that your interest rate can change within a certain period of time. This limitation places a cap on your interest rate and once that cap is reached, your rate will not increase for the remainder of that particular 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.
A potential borrower’s credit rating is a critical factor in the final decision on the interest rate on an adjustable rate mortgage refinance. How much equity has been put in your home can also help if you have a low credit score – the more equity you have, the more likely you are to have a lower mortgage interest rates.
Potential homebuyers with bad credit will often be directed toward an ARM. Though it is possible to buy a home with a poor credit score, the interest rates are going to be much higher than the average loans available to consumers. There may be a significant difference in the rates offered.
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.