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Can You Refinance with Bad Credit? An Adjustable Rate Mortgage (ARM) is a loan that is adjusted at certain intervals based on the current interest rate. During this economic crisis you will benefit substantially as the interest rates continue to fall. However, when the interest rates start to climb you will pay the higher rates of interest. The rate for the ARM is based on what is known as an index rate. The index rate goes up and the rate is set at the higher rate. The index goes down and the rate is set at the lower rate. There are sometimes caps on the ARM. Here’s one example: A loan with 2-2-6 means that the first year the percent will be 2% more than the current index or rate. The following years will have a 2% maximum amount of increase. Overall the maximum percentage increase can be no more than 6% of the loan. If you do not have a cap on your ARM you may want to refinance to get a fixed rate mortgage. The instructions below tell you how to refinance in six moderately difficult steps.

Step 1: When you are ready to refinance you need to canvas the market for the best rates. Call lenders or go on line to find current interest rates and fees associated with the refinance. There are specialists that handle only refinance products. The lenders will compete with each other for your business by offering different rates of interest and different charges for refinancing your loan.

Step 2: You will need to know the current rate of your ARM. The ARM has set periods of time that the rates are recalculated. These are generally adjusted at the three year, five year, seven year or ten year period. At this time your rate will be adjusted higher or lower depending on the index or the rate available at that time.

Step 3: Your interest rate is not the only consideration. Look at the fees the lender charges to refinance your note. If you are not planning on staying in the home permanently, you may not want to pay the expense of refinancing. If you are planning to stay for the long haul, you may benefit by obtaining a fixed rate refinanced loan to replace your ARM. The closing costs that you pay will be recouped over a length of time and will make the refinance beneficial to you.

Step 4: Your ARM may have a penalty for early payment. These penalties are generally applicable to the first three year period of the loan. You will need to determine that amount and add it to the cost of the refinance before you determine that you will benefit.

Step 5: Find out if you are entitled to a discount. Some lenders have discounts they offer to entice you to do business with them. Find out when the discount expires and what the rate will be on expiration. Calculate all these expenses with those above to make sure you will still benefit from refinance.

Step 6: If you are refinancing and getting another ARM, make sure that you get one with a cap on the interest rate. There are periodic caps and there are overall caps. The periodic cap limits the rate charged during a specific period of adjustment. The overall cap limits the rate charged for the length of the loan. Again, you will want to add the charges to the cost of the refinance and determine if you want to go with another ARM or you want to convert to a fixed interest rate mortgage. You need to select the one that benefits you the most.

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