Adjustable-rate Mortgage Explained

At Mortgage Canada we strive to help you make smarter financial decisions. When you get a mortgage, you can choose between a fixed-rate or adjustable-rate mortgage, known as an ARM mortgage. Fixed-rate mortgages its features is keeping the same interest rate for the life of the loan, while adjustable-rate mortgages have fluctuating rates.

What is ARM?

An adjustable-rate mortgage, or ARM, is a home loan in Canada with an interest rate that can change periodically (May go up and down). Initially, the interest rate is lower than that of a comparable fixed-rate mortgage. After a certain period ends, interest rates and monthly payments can go lower or higher. Interest rates can be unpredictable, they tend to trend up and down over multi-year cycles.

What are the key features of ARM

Adjustable-rate mortgages may come in different varieties, each one has its features and options. The choice you ultimately select can make a huge difference in the quality and cost or the mortgage you end up with. Therefore, when it comes to finding the adjustable-rate mortgage that is right for you, it will help you benefit compared to others.

The Introductory Rate – There some lenders that will offer an introductory rate that is below their prime lending rate for a limited period. After the introductory period (which usually lasts for 3 to 6 months), your adjustable-rate mortgage will revert to an agreed-upon indexed rate.

The Actual Rate –  After the expiration of the introductory period this will be the main rate that the ARM reverted to. As you determine the actual rate the majority of your borrowing costs over the term of the mortgage, you need to find the best actual rate or best possible combination of introductory and actual rates that are available on the market. CMI’s are mortgage specialists who are dedicated to finding you the best mortgage rates and terms that are commercially available, this may include from CMI’s network of private lenders that are not accessible by the public.

Conversion Options – Some lenders will allow you to convert your adjustable-rate mortgage from a variable-rate to a fixed-rate mortgage, but the costs of doing so, and the rate offered on conversion can be punitive.

Adjustable-rate mortgages follow rate indexes and margins

Based on the index tied up to your mortgage, After the fix-rate period ends, the interest rate on an adjustable-rate mortgage may go up or down. There different types of indexes and your loan paperwork identify which index associated with your adjustable-rate mortgage. The index is interest-rate set by the market in Canada Mortgage published by a neutral party.

For setting up ARM the lender will take the index rate and add the agreed percentage points which are the margin. Your index rate may change but not the margin.

There are several forms of Caps

A periodic rate cap: This may limit your interest rate to how much the interest can change from one year to the next.

A lifetime rate cap: This is limiting how much the interest rate can rise over the life of the loan.

A payment cap: limits the amount of the monthly payment.

Bottom line:

An adjustable-rate mortgage is a powerful tool that you may use for your mortgage. By choosing the right index that will work for you, you may surely save up to your interest and can pay your loan in a short period. However, since ARM rates may fluctuate, it depends on the appraisal value on the market.

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