The Common Sense Investor

Adjustable rate mortgages offer home buyers a lower fixed rate at the beginning of the loan, making them ideal for short-term owners.

When buying a house, you don’t just have to contend with the many choices available to you in terms of the property itself. You also have to tackle the issue of what mortgage type the best fit to your financial needs as well as your long-term plans.

With the many mortgage types available in the market, choosing the one that would be the most beneficial for you and your family can be complicated and confusing.

One of the more popular mortgage types is the Adjustable Rate Mortgage (a hybrid between fixed rate and variable rate mortgages). This type of mortgage starts off with a low fixed rate (up to 3 per cent lower than a fixed rate mortgage) and then ends with a fluctuating adjusted interest rate, usually on a yearly basis.

After the fixed rate period (which is usually 3,5 or 7 years), an djustable rate mortgage (ARM for short) offers an interest rate that is adjusted at pre-specified intervals to reflect certain indicators in the market. This means that if the indicators drop then the interest rate also drops thus allowing you to pay less. If the indicators rise, then that means that you will pay a higher monthly payment. Because of the fluctuating interest rate, there is an amount of risk involved in an adjustable rate mortgage that needs to be considered.

The advantages of an adjustable rate mortgage is that if interest rates continue to fall then your monthly payments also decrease alongside with it. In other words, when interest rates fall, you don’t have to refinance to take advantage of the lower rates. Additionally, as with many mortages, an adjustable rate that has no other special incentives should allow you to repay a part or all of your loan without the need to pay any early repayment charges.

The main disadvantage to an ARM, or any variable rate mortgage for that matter, is that once you enter the adjusted phase of your loan, your monthly payments will increase whenever current mortgage rates are on the rise.

So when do you opt to take an adjustable rate mortgage?

• When you do qualify to get a fixed rate mortgage but the interest rates are too high
• If you want to save more money during the first few years of the loan term because an adjustable rate mortgage has a lower interest rate during the early part of the loan period.
• If the documents you have presented do not allow you to qualify for a fixed rate mortgage

Additionally, your own personal situation might make it a good idea to choose an adjustable rate mortgage:

• If you do not have plans of staying in the house that you will buy for more than a few years, then an adjustable rate mortgage would be a good choice because you will pay lower interest for the first few years compared to a fixed rate mortgage.
• If you foresee that your income will increase over the next few years, then an adjustable rate mortgage can also be a good idea because the monthly payments you make for the first few years are lower and if the monthly payments eventually rise, they’ll do so in conjunction with your income.