Adjustable Rate Mortgages (ARMs) – Understanding the Basics
When it comes to buying a residential or commercial property, many home buyers consider adjustable rate mortgages (ARMs) as an option for financing. ARMs are mortgage loans with an interest rate that adjusts periodically based on a specific index. In this blog post, we’ll dive into the basics of adjustable rate mortgages, its pros and cons, and the best way to use it for your residential or commercial property.
What are Adjustable Rate Mortgages (ARMs)?
An adjustable rate mortgage (ARM) is a type of mortgage loan where the interest rate is not fixed and changes periodically based on a specified index. The index is a benchmark rate, such as the London Interbank Offered Rate (LIBOR), and the changes in the index are reflected in the mortgage loan’s interest rate. ARMs have a fixed rate for a specified period of time and then adjust based on the market conditions. The adjustment period can range from one year to ten years.
Pros and Cons of Adjustable Rate Mortgages
Like any financial decision, adjustable rate mortgages have pros and cons that are worth considering.
Lower Initial Rates: ARMs typically have a lower interest rate than fixed-rate mortgages during the initial period, making your monthly payments lower.
Flexibility: ARMs offer flexibility in terms of how long you plan to stay in the property. If you plan to sell the property in a few years, an ARM may be a good choice because the adjustable rate means you don’t have to worry about your monthly payments rising in the future.
Affordability: ARMs can make it easier to afford a property that might otherwise be out of reach, especially for first-time home buyers.
Uncertainty: One of the biggest drawbacks of ARMs is the uncertainty of future interest rate adjustments. It’s impossible to predict exactly how much the interest rate will change and how much your monthly payments will increase.
Higher Payments: If the interest rate goes up, your monthly payments will increase, making it more difficult to keep up with your mortgage payments.
Risk: ARMs are riskier than fixed-rate mortgages because the interest rate can change significantly over time.
When to Consider Adjustable Rate Mortgages for Residential and Commercial Properties
ARMs are ideal for those who plan to stay in the property for a short period, who expect their income to increase over time, or who are looking to take advantage of lower initial interest rates. ARMs are also ideal for those who are investing in a commercial property and expect the property value to increase over time.
In conclusion, adjustable rate mortgages are a flexible and potentially cost-saving option for home buyers and commercial property investors. However, it’s important to understand the risks involved and to work with a trusted mortgage lender to determine if an ARM is the right choice for your financial goals. Contact us today to learn more about our adjustable rate mortgage options and how we can help you secure the financing you need for your residential or commercial property.