Bad Credit Home Loans: The ARM is Not For Everyone

By Gabriel Traverso
Mortgage Credit Problems Columnist

Over the past few years home prices have risen such that many homeowners turned to alternative home loans like ARMs and interest-only mortgages. For those with bad credit this may not be the right move.

An Adjustable Rate Mortgage Means Rising Payments

An adjustable rate mortgage differs from a traditional fixed-rate loan in that you are often given a lower initial rate, maybe for a term of one month to several years, and then your mortgage rate moves with the financial index on which it is based. The problem is that a bad credit adjustable rate can carry a margin many points higher than the index to compensate the lender for the higher risk of a carrying a bad credit loan. Your payments could increase prohibitively when the ARM provision kicks in even if prevailing interest rates do not.

Bad Credit Mortgages Are a Short Term Solution

If you have bad credit, the sub prime rate you can get today is probably not the rate you're going to want tomorrow. What's so great about a thirty year fixed rate that is 5 points higher than the rate good credit borrowers pay? The idea behind taking a bad credit mortgage is that you make your payments, develop a better debt management track record, and put some distance between your deadbeat past and your good credit citizenship today. You want the lowest rate and payment available--for a couple of years.

ARMs: Betting On Your Future

Bad credit borrowers are different from other borrowers--your bad credit mortgage is a temporary solution, not a way of life. Find a hybrid ARM with a payment you can manage (if you can't then set your sights lower), get a rate that is fixed for 2 or 3 years, and make sure there isn't a prepayment penalty longer than your 2 or 3 year fixed rate period. Then use the next two or three years wisely.

About the Author
Gabriel Traverso is a free-lance writer, professional musician and artist. He resides with his family in Reno, NV.

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