Adjustable rate mortgages (ARMs) are loans that begin with a low interest rate and adjust eventually to a much higher rate. This higher rate normally corresponds to a benchmark interest rate, such as the yield on the 10-year U.S. Treasury Note, and may change over time as the benchmark fluctuates.
ARMs often are offered to novice borrowers who may not understand the implications of adjustable rates. ARM borrowers tend to have poor credit, and thus the initial low interest rates (and correspondingly low monthly payments) make the loan seem affordable. When the rates adjust and monthly payments rise, however, borrowers suddenly are unable to make their payments.
Consequently, it usually is wise to refinance your ARM with a fixed-rate mortgage before the rate adjusts. This is particularly true if your credit has improved, or if market interest rates are set to rise. As of July 2006, market interest rates have been increasing for more than three years. While there is reason to believe that rates might drop within the next six months or so, if you are able to find a fixed-rate mortgage with a rate comparable to your ARM’s introductory rate, you definitely should consider refinancing.
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