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FAQs about ARMs: what you need to know

You've probably heard a lot of things about adjustable-rate mortgages (ARMs) and aren't sure whether or not having one is the right choice. Here are some frequently asked questions about ARMs that can help you make the right choices for your situation.

When will the interest rate change on an ARM?

Many homebuyers are nervous about getting in an ARM because of all the horror stories about rate resets and escalating payments. It's important to work with a competent mortgage lender who can explain the different mortgage loan options available to you. Many homebuyers are attracted to ARMs because they initially carry lower interest rates than fixed-rate mortgages. For example, with a hybrid 5/1 ARM the low rate is fixed for years before it can change depending upon market conditions. The interest rate change usually depends on an index such as the London Interbank Offered Rate (LIBOR). The amount that interest can rise on an ARM loan usually has an annual or lifetime cap.

Should I refinance into a fixed-rate mortgage if my ARM is about to reset?

Refinancing an ARM loan can be a smart option if you don't want to deal with jumping mortgage payments in the future. Even though mortgage rates have recently been at historic lows, they are not guaranteed to stay that way forever. Before deciding to refinance a home loan, run the numbers to determine whether or not your payments will be lower after a rate reset or by refinancing into a fixed-rate mortgage. Adjustable mortgage rates can rise and fall, so it could make sense to hold off on refinancing if your mortgage rate would actually be better than with a fixed-rate loan. Compare refinance deals from several mortgage lenders to determine if refinancing is a good move at this time.

Can I get rid of a subprime ARM loan?

It's likely that you took out a subprime ARM loan because you didn't have the best credit or couldn't document your income. You may be having a tough time making the payments on a subprime ARM loan and are at risk of falling behind. If possible, refinance into a fixed-rate loan with stable payments. Talk with your mortgage lender if you are concerned about not being able to pay your mortgage. The mortgage lender may be willing to work with you to refinance or modify your loan. Don't wait until your mortgage loan has adjusted to start making inquiries.

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