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What Are Adjustable-Rate Mortgages?

by | May 4, 2022 | Mortgage FAQ

Adjustable-Rate Mortgages, also known as Variable-Rate Mortgages, are among the most popular housing loans offered by lenders in Canada today.

They are preferred by most homeowners because their interest rate is not constant throughout the mortgage term as it’s typical for Fixed-Rate Mortgages. Instead, the rate keeps fluctuating based on the underlying index.

As you might expect, Variable-Rate Mortgages entail quite a lot. So, if you wish to learn more about them, you are on the right page. As we delve deeper into this article, you will get great insights that will help you get the right ARM to suit your housing needs.

Without further ado, let’s learn!

What is an Adjustable-Rate Mortgage?

As mentioned earlier, an adjustable-rate mortgage is a type of housing loan issued to homeowners. Yet, unlike Fixed-Rate Mortgages, ARMs have fluctuating interest rates.

These interest rates vary depending on the market conditions, thereby making it a great option for the majority of homeowners in Canada.

How An Adjustable-Rate Mortgage Works

Generally, once you receive a mortgage loan, it’s automatic that you have to repay the lender over a predetermined period. And how you do it will be as per your agreement and the terms of payment.

One good thing about ARMs is that their initial borrowing costs are usually locked at a lower rate in the initial phase of repayment. However, depending on the general cost of borrowing and the state of the economy, the interest rates the lender will impose for your monthly mortgage payments may either rise higher or go lower after that time.

Where can I get an Adjustable-rate mortgage loan?

Currently, there are numerous lenders that offer this type of loan. Ideally then, where you can get an Adjustable-rate mortgage isn’t that much of a big deal. The real question should be where you can get one that perfectly suits your needs.

    This is because Adjustable-Rate Mortgages come with different features and terms. And owing to the availability of numerous lenders out there, comparing one ARM to another can be a pretty difficult task.

    However, there is no need for you to fret yet!

    At Envolve Mortgage Group, we can help you screen the numerous lenders out there to get the ARM that best suits your needs.

    That said, here are some of the common lenders that finance such loans:

    • Insurance companies
    • Banks
    • Trust companies
    • Private lenders

    Features of Adjustable-Rate Mortgages

    Understanding ARM features is very crucial for you in that it determines the quality of loan you get, the costs you incur as well as the type of loan you end up with. 

      With that in mind, here are some of the key features of ARMs:

      • The Introductory Rate – For most lenders, the introductory rate is usually lower than the prime rate. However, it remains so only for a short period of time, (normally 3-6 months) after which your ARM rate will revert to the indexed rate that was agreed upon initially
      • The Actual Rate – This is an indexed rate that the introductory rate normally reverts to. Here, it is very advisable that you choose the best possible combination of introductory and actual rates because the latter determines your borrowing costs over the entire mortgage term
      • Conversion Options – Apparently, most lenders don’t mind you switching from a Variable- Rate to a Fixed-Rate Mortgage. However, you ought to know well in advance that the costs and rate of doing so can be quite high

      Pros and Cons of Adjustable-Rate Mortgages

      Like every other financial tool, Adjustable-Rate Mortgages have their share of advantages and disadvantages. Some of them include:

      Pros

      • The introductory rate provides you with a cheaper first interest rate and monthly payment than other loans, thereby allowing you to save
      • Unlike with Fixed-Rate Mortgages, most lenders allow you to convert your ARMs to Fixed-Rate Mortgages 
      • Prepayment penalties are quite low compared to other types of mortgages
      • During the Actual Rate period, the interest rate fluctuates. This can be beneficial if the interest rate goes down, meaning your monthly payments will also decline
      • When the interest rate subsides, you enjoy lower rates without going through the refinancing paperwork or incurring the costs

      Cons

      • After the first phase of making predictable monthly payments, the next stage is usually unpredictable. The interest rate may increase – you may pay a relatively more significant amount of money
      • Prepayment penalties often apply to several ARMs
      • When choosing an ARM, it is very difficult to identify one that best suits your needs. This is because most ARMs come with varying terms and what is more, there are numerous lenders out there, each providing ARMs with different terms and features 
      • The complexities and terms in ARM, such as the structure, fee, and other facts, may sometimes prove tricky to grasp. That can complicate things for a borrower who doesn’t seem to understand them fully

      How Long Would You Take to Settle an Adjustable-Rate Mortgage?

      An ARM’s initial interest rate, principal, and interest payment amount are only valid for a limited time.

      Therefore, regarding how long you would take to settle the loan solely depends on the amount you end up borrowing and the terms of payment you agree upon with your lender.

      With that in mind, it is important that you first get to thoroughly understand your needs since it helps you determine the amount you need. Once that is done, you can consult with us and we will help you choose the best ARM that will suit your needs.


      This will not only provide you with a more realistic payment period but also enable you to budget well in advance.

      Conclusion

      An adjustable-rate mortgage may be a good idea if you have a stable income and only plan to own a home for a certain period.

      However, keep in mind that the interest rate might increase or decrease depending on the market inflation during the adjustable phase. Hence it’s prudent first to understand the complex terms accompanying an Adjustable-Rate Mortgage before considering it.

      For further information regarding Adjustable-Rate Mortgages, book a call with me today.

      Are you ready to purchase a home? Reach out to me directly or start your application here: www.sandraforscutt.ca/mortgage-application/

      Don’t hesitate to contact us with any questions you may have.

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