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Adjustable Rate Home Mortgage

An Adjustable Rate Mortgage, which is popularly called an ARM; is a mortgage on which the lender has the ability to change the interest rate on the mortgage.

A traditional or fixed rate mortgage has an interest rate that is locked in for the life of the mortgage. An example of a typical mortgage would be a twenty year mortgage with a six percent rate. The advantage to such a mortgage is obvious: the home buyer knows what rate they get and what payments they will be making for the life of the mortgage.

The ARM was a very popular mortgage a few years ago because it was an easier mortgage to issue to people with bad credit or limited incomes. Fewer ARMS have been issued in recent years because mortgage lenders are less likely to work with sub prime borrowers.

How an Adjustable Rate Mortgage Works

In a typical adjustable rate mortgage, the lender has the right to raise or lower the interest rate to match the standard interest rates. Most ARM interest rates will go up when the interest rate goes up and down when the interest rate goes down.

The advantage to this arrangement is that the mortgage holder can take advantage of lower interest rates. The disadvantage is that the homebuyer will be forced to pay higher interest rates when the interest rate goes up.

Perils of Adjustable Rate Mortgages

The big danger from an adjustable rate mortgage is that the interest rate will cause payments to increase to a level that exceeds the homeowners’ ability to pay. Many people have been forced into foreclosure because they were unable to pay higher payments mandated by ARMS.

Another potential problem with ARMS is that in some cases, lenders will be able to increase the interest rate at any time. This could resort in a person being forced to pay higher monthly payments and could lead to foreclosure.

The lender usually spells out the terms of when they can change the rates on an arm. Homebuyers should read their mortgage documentation to make sure they won’t be taken by surprise by an increased interest rate.

When to Refinance an ARM

The best course of action for a homeowner with an adjustable rate mortgage is to refinance it. That is to replace the ARM with a traditional fixed rate mortgage with the lowest possible interest rate possible. This way the homeowner will know what their mortgage payments will be and not face any nasty surprises when the ARM changes.

A homeowner with an ARM who has good credit and a good record of making mortgage payments shouldn’t have any trouble refinancing it into a fixed rate mortgage. Those who are faced with bad credit or low income might be able to qualify for government programs that help such individuals replace ARMS with fixed rate mortgages.

Generally, an adjustable rate mortgage is a bad deal for the average homeowner and should be refinanced as quickly as possible.