Adjustable Rate Mortgages Hold Hope for Bad Credit Borrowers

by Joe Taylor Jr. CMR Columnist

Despite the extreme cases of credit card abuse profiled on the popular talk shows, most bad credit situations arise because of illness, injury, or sudden job loss. When you know your struggles with bills are temporary and you need a short-term boost in your monthly budget, an adjustable rate mortgage can help.

As the term implies, an adjustable rate mortgage is a home loan that rises or sinks with the prime interest rate set by the Federal Reserve Board. If you have bad credit, your lender might force you to accept a mortgage rate many points higher than the prime rate. Since mortgages are guaranteed by the value of real estate, you can almost always find a lender willing to underwrite a bad credit mortgage on an adjustable rate.

Making Adjustable Rate Mortgages Work

There are a few ways you can leverage your bad credit adjustable rate mortgage into a better deal once your credit score improves. First, find out if your home's seller is willing to do an "interest buy-down." Instead of simply negotiating a lower price for the home you wish to purchase, your seller can make a cash payment to your lender in exchange for reducing your interest rate. Though the net result to the seller is the same, this good faith gesture effectively saves you thousands of dollars in interest.

Second, experts recommend that you pay down as much principal on your adjustable rate mortgage as your budget will allow. Once you have reached more than twenty percent equity in your home, you can eliminate expensive mortgage insurance and even refinance for a better deal.

In the meantime, though, an adjustable rate mortgage might give you the best option to get yourself into a great home on bad credit.

Sources
Boston Globe
Santa Cruz Sentinel

About the Author
Joe Taylor Jr. coaches beginning mortgage brokers to provide better customer service and to understand creative financing opportunities.

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