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Benefits of Adjustable-Rate Mortgages for Borrowers with Bad Credit
Author David Schneider | Jan 07,2008
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Shopping for a loan when you have bad credit can often be a nerve-racking experience. High interest rates and the fear of loan rejection are unpleasant possibilities. However, there are unique opportunities if you are a loan seeker with poor credit. One such option is the adjustable-rate mortgage (ARM).What Is an Adjustable-Rate Mortgage (ARM)?Interest rates that are included in a mortgage loan come in two different flavors: fixed-rate and adjustable-rate. A fixed-rate mortgage is exactly what it sounds like -- the mortgage rate you lock in when you acquire the loan is the same rate you will pay year after year until paying off the loan. An adjustable-rate mortgage, on the other hand, rises and falls in accordance to whatever the current market interest rate may be. Typically, this rate changes on an annual basis, but can vary depending on the terms of your loan. Three- and five-year ARM loans are also quite common.How Can You Benefit From an Adjustable-Rate Mortgage?No matter what your credit score, adjustable-rate mortgages are often the preferred type of mortgage when market rates are high. This is because few people want to lock in that high interest rate with a fixed-rate mortgage. Eventually, those market rates are likely to fall, and an adjustable-interest rate mortgage allows your monthly payments to fall with it.For borrowers with bad credit, any time may be the right time to choose an adjustable-rate mortgage. This is because ARM loans tend to carry a slightly lower interest rate than comparable fixed-rate mortgages. In the short-term, this can pay off (until market rates start to rise). Due to your poor credit, your approval is likely contingent on a higher interest rate. Therefore, any bit of help you can receive on your loan expenses is considered advantageous.Refinance Your Adjustable-Interest Rate Loan Once Credit Has ImprovedAs mentioned above, an ARM loan is a good short-term option. Hopefully, over the next couple of years as a new homeowner, you will be consistently paying your monthly mortgage payment, as well as other debts. By doing so, your credit score will improve over time.Once your credit score breaches the 620 mark, you will be eligible for loan approval at a lower interest rate then when you originally applied for your mortgage. When you reach this glorious achievement, it's time to refinance that adjustable-rate mortgage and lock in a lower rate with a new fixed-rate mortgage.
Shopping for a loan when you have bad credit can often be a nerve-racking experience. High interest rates and the fear of loan rejection are unpleasant possibilities. However, there are unique opportunities if you are a loan seeker with poor credit. One such option is the adjustable-rate mortgage (ARM).What Is an Adjustable-Rate Mortgage (ARM)?Interest rates that are included in a mortgage loan come in two different flavors: fixed-rate and adjustable-rate. A fixed-rate mortgage is exactly what it sounds like -- the mortgage rate you lock in when you acquire the loan is the same rate you will pay year after year until paying off the loan. An adjustable-rate mortgage, on the other hand, rises and falls in accordance to whatever the current market interest rate may be. Typically, this rate changes on an annual basis, but can vary depending on the terms of your loan. Three- and five-year ARM loans are also quite common.How Can You Benefit From an Adjustable-Rate Mortgage?No matter what your credit score, adjustable-rate mortgages are often the preferred type of mortgage when market rates are high. This is because few people want to lock in that high interest rate with a fixed-rate mortgage. Eventually, those market rates are likely to fall, and an adjustable-interest rate mortgage allows your monthly payments to fall with it.For borrowers with bad credit, any time may be the right time to choose an adjustable-rate mortgage. This is because ARM loans tend to carry a slightly lower interest rate than comparable fixed-rate mortgages. In the short-term, this can pay off (until market rates start to rise). Due to your poor credit, your approval is likely contingent on a higher interest rate. Therefore, any bit of help you can receive on your loan expenses is considered advantageous.Refinance Your Adjustable-Interest Rate Loan Once Credit Has ImprovedAs mentioned above, an ARM loan is a good short-term option. Hopefully, over the next couple of years as a new homeowner, you will be consistently paying your monthly mortgage payment, as well as other debts. By doing so, your credit score will improve over time.Once your credit score breaches the 620 mark, you will be eligible for loan approval at a lower interest rate then when you originally applied for your mortgage. When you reach this glorious achievement, it's time to refinance that adjustable-rate mortgage and lock in a lower rate with a new fixed-rate mortgage. |
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