Adjustable-rate mortgages
Adjustable-rate mortgages (ARMs) usually start with a lower interest rate and a lower monthly payment, making them rather popular. The interest rate can change during the life of the loan which means that your monthly payment can increase or decrease.
It is important to understand mortgages and what they offer, their advantages and disadvantages and ultimately, which mortgage suits your lifestyle best. Adjustment periods of ARMs determine when and how often the interest rate can change. There is an initial fixed-rate period during which the interest rate cannot change, and after the initial period, the interest rate will often adjust each year. There is a number system in ARMs, for example 10/1, which means that the ARM will not change for the first 10 years, but can change in the 11th year and again every year after that.
Because the initial interest rate is usually low, your initial payments will be lower and you may qualify for a larger mortgage amount and if the interest rates drop during any adjustment period, your monthly payment may decrease.
Interest can change at every adjustment period, based on two factors: the “index” and the margin. The rates for indexes reflect current financial market conditions which is why your interest rates can change at each adjustment period, while margin refers to the amount that is added to the index to determine what your new mortgage rate will be until the next adjustment period. Rate caps are put in place to limit the amount your interest rate can increase over the life of your mortgage.
An ARM with a low initial interest rate and an initial adjustment period after 5 or 7 years can save you money, but interest rate increases will increase your monthly payment.
It is important to speak to a financial advisor before applying for a particular type of mortgage. You have to know your financial capabilities and take out a mortgage that suits you and your lifestyle.
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