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Adjustable Rate Mortgage: A Consolidation Option

Apr 23, 2008
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, 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 more appealing. A hybrid mortgage can begin with a fixed or an adjustable rate, which remain intact for two years. After two years 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 are lower than the adjustable rate.

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 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.

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.
About the Author
Interested in mortgage refinancing? Check out www.allaboutmortgagerefinancing.com and learn about Cash Out Mortgage Refinancing Plans and other related information.
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