An A.R.M. or a Leg? :: SoundBiteBlog.com

An A.R.M. or a Leg?

March 15th, 2007 by Mark Flanders

Money and pocketwatch An adjustable rate mortgage (A.R.M.) is one of the most popular options available to both home buyers and homeowners considering a refinance. Many borrowers do not fully understand the concept of an A.R.M. and as a result may be somewhat hesitant to pursue this type of a mortgage. There are some situations in which an A.R.M. or a hybrid mortgage can be the best mortgage solution for a homeowner who is in the process of refinancing. This article will focus on explaining the concept of an A.R.M., explaining situations where it is the best solution, debunking the most popular misconception regarding A.R.M.s and explaining how those with bad credit can benefit from an A.R.M. At the conclusion of this article you should have a better understanding of A.R.M.s and may want to investigate this option further.

What is an A.R.M.?

A.R.M. is an acronym for an adjustable rate mortgage. This means the interest rate associated with the mortgage is not fixed. Instead it is tied to an index such as the prime index and may rise and drop as the associated index rises and drops. The fact that the interest rate is variable scares many borrowers away from considering this option further. However, there are certain safety measures in place which protect the homeowner from rapid increases.

The Biggest A.R.M. Myth

The variability of the interest rate in an A.R.M. makes many homeowners feel apprehensive. Many borrowers envision interest rates going through the roof during their loan term, and resulting in their monthly payments skyrocketing. Fortunately for these borrowers, rapidly increasing interest rates may not have a significant effect on A.R.M. s.

This is because A.R.M. s have a built in clause which prevents the interest rate from rising more than a certain amount during a specific time period. Although the national interest rate may rise significantly, the A.R.M. is strictly limited to a predetermined maximum. This maximum limit is determined before the borrower signs a single document.

When is an A.R.M. Desirable?

Money in a mousetrap One of the most popular types of adjustable rate mortgage is the hybrid mortgage. Hybrid mortgages typically have one component which is fixed and one component which is adjustable. These types of mortgages may have a fixed rate for a set number of years. The don’t truly begin to vary until after this initial period. Alternately, a hybrid loan may be variable for a number of years and then become fixed after this initial period.

The adjustable rate mortgage loan which begins with a fixed rate is often desirable because the introductory rate is typically lower than the rate offered on traditional fixed rate mortgage loans for homeowners with comparable credit ratings. Homeowners may particularly like this option if they are not planning to be in the home for an extended period of time.

A.R.M. s for Those with Bad Credit

A.R.M. s can also be very helpful for assisting those with bad credit in purchasing a home for the first time. There are a variety of loan options available today which makes it possible for even homeowners with poor credit to obtain a home loan. However, those with bad credit are usually offered these loans with unfavorably higher interest rates. Additionally, lenders may only be able to offer those with poor credit an A.R.M. Lenders take significantly greater risk when they lend money to a homeowner with bad credit. As a result the lenders often compensate for this increased risk by only offering the homeowner an adjustable rate as opposed to a fixed rate mortgage loan.

Knowledge is the key to deciding what type of mortgage loan is best for your situation. The best advice? Ask questions until you thoroughly understand the terms of any mortgage. Make sure you have no questions at all before you sign any paperwork.

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