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Adjustable Rate Mortgage Information

By: Regina Maniam

Many homeowners do not have sufficient adjustable rate mortgage information and therefore are a bit hesitant the take this option. An adjustable rate mortgage (ARM) is a popular option for both home mortgages and refinancing. There are times when ARM or a hybrid mortgage are better options for the homeowner considering refinancing.

This article focuses on:

  • Explaining the concept of ARM

  • Explaining when it is the best solution

  • Debunking misconceptions regarding ARM

  • Explaining how people with bad credit can benefit from ARM


    • 1. Adjustable Rate Mortgage Information

    ARM or adjustable rate mortgage means the interest rate related to the mortgage is not fixed. It is actually tied to an index like the prime index, and may therefore rise or drop as the related index rises and drops.

    The variable interest rate scares homeowners from this option, but there are measures in place that protect the homeowner from rapid increases.

    2. The Biggest ARM Myth

    Homeowners may be concerned that due to the possibility of varying interest rates, their monthly payments can skyrocket. The good news is that the rapidly increasing interest rates may not have a significant impact on ARMS.

    The reason is that most ARMs have built in clauses that prevent the interest rate from rising more than a certain amount during a specific time period. The national interest rate may rise significantly during this time, but there is a maximum on the amount that the homeowner's interest rate will be raised.

    3.When is an ARM Desirable?

    ARM is desirable when it is part of an hybrid mortgage. This means that the mortgage has a fixed component and an adjustable component. The hybrid mortgage could start with a fixed rate for an initial period after which it can vary. Or alternatively, start with variable for the initial period and then move to fixed.

    The loan starting with the fixed rate is usually desirable as the introductory rate is typically lower than that offered on traditional fixed loans for homeowners with comparable credit ratings. This is particularly the case when home owners are repaying a smaller second mortgage and may be able to repay the loan in full during this introductory period.

    4. ARMs for Those with Bad Credit

    ARMs can even help homeowners with bad credit when they purchase a home for the first time. There a few options available to them. Usually, these people are offered loans with unfavorable terms like higher interest rates. Additionally, they may be offered an ARM. As lenders are taking a significantly higher risk when they lend money to those with bad credit, they usually compensate for this by applying less favorable terms.


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