Are you new to mortgages and wondering what an Adjustable-Rate Mortgage (ARM) is and how it works? With interest rates rising at an unpredictable rate, more and more homebuyers are considering an adjustable-rate mortgage, or ARM, in comparison to the fixed-rate mortgage. This allows you to repay the amount you have borrowed at varying interest rates, throughout the course of your mortgage. However, it’s important to consider both the advantages and disadvantages of an ARM before opting to choose it.
How An Adjustable-Rate Mortgage Works?
ARMs’ interest rates fluctuate over time. For the first few years, your interest rate will be fixed. Loan terms vary by borrower, but many ARMs have a fixed interest rate for the first five, seven, or even ten years of the mortgage. Sometimes homeowners lose their fixed rate after three years of mortgage payments.
Following the initial time period of your mortgage, interest rates continue to change as per market trends, with interest rates even adjusting every six months or once a year. The numbers used by lenders to approve mortgages can help you determine the timing for your loan.
Advantages of Adjustable-Rate Mortgage
- Lower initial rates: Many lenders offer borrowers a lower interest rate when they choose an ARM over a fixed-rate mortgage to allow for future adjustments and increases. This implies you can pay less in the first few years of house ownership.
- Reduced monthly payments: Depending on the current market index value, entering the adjustment period of your loan may result in a lower mortgage payment. The changing market has a significant impact on the advantages and disadvantages of adjustable-rate mortgages.
- Flexibility with property sales: Do you only intend to stay in your current property for a few years? You can sell and buy a new home before your interest rate changes, as long as you do so during your initial fixed-rate period.
Disadvantages of Adjustable-Rate Mortgages
- Larger mortgage payments: Despite their many advantages, variable-rate mortgages have some drawbacks. One of the most common one is that you will wind up with a larger monthly mortgage payment as early as three years into the loan term.
- Higher rate increase: Unexpected changes in market index values may lead your interest rate to rise several points with each adjustment. If your interest rate rises during a period of financial hardship, it may risk your homeownership status.
- More risk of penalties: Before taking out a mortgage, always discuss the loan terms with your lender. Some impose penalties on people who sell their property before paying off the loan or refinance for a cheaper interest rate. These penalties are intended to compensate for future increases in interest rates.
So, these were some of the advantages and disadvantages of Adjustable-Rate Mortgages (ARMs) as explained by our expert mortgage brokers in Surrey. If you are planning to apply a mortgage or looking for refinance or mortgage renewal in Surrey, rely on none other than Sandhu & Sran Mortgages. We are your trusted mortgage consultants committed to helping clients in getting the best possible deal at the lowest possible rate. For more details, give us a call.