What is an Adjustable Rate Mortgage and How Can it Help You?

Adjustable Rate Mortgages (ARMs) are an increasingly popular option for homeowners looking to buy a home or refinance their existing mortgage. With an ARM, the interest rate on your loan can change over time. This can be a great option for homeowners who want to take advantage of a lower rate, but it also carries some risks. In this article, we’ll examine what an adjustable rate mortgage is, how it works, and what advantages and disadvantages it offers. We’ll also look at when an adjustable-rate mortgage might be the right choice for you, how to choose the right one, and how to calculate your adjustable-rate mortgage payments. Finally, we’ll discuss some common adjustable-rate mortgage terms and offer some tips for managing an adjustable-rate mortgage.

Introduction to Adjustable Rate Mortgages

An adjustable-rate mortgage (ARM) is a type of mortgage loan that has an interest rate that can change over time. ARMs typically start with a fixed rate period, during which the interest rate will stay the same. After this period, the interest rate can increase or decrease depending on the terms of the loan. ARMs are popular because they generally offer lower rates than other loan types. However, they also carry some risks, such as the potential for higher payments in the future.

How an Adjustable Rate Mortgage Works

An adjustable-rate mortgage works similarly to other mortgage loans. You apply for the loan and provide documentation of your income, credit, and other financial information to your mortgage broker. Once approved, you will make monthly payments to pay off the loan. Those payments are applied to your principal and the interest portion of your regular monthly mortgage payment.

The difference with an ARM is that the interest rate can change over time, and your interest portion of the mortgage payment will change as the prime lending rate changes. If the prime lending rate moves upward, so will the interest portion of your mortgage payment; and your payment will increase. Likewise, if the prime lending rate moves downward, so will the interest portion of your mortgage payment; and your payment will decrease. In a true adjustable-rate mortgage the principal portion of your mortgage payment remains the same, paying off the mortgage principal on your original loan amortization schedule.

Generally, the initial rate is lower than what you would get with a fixed-rate mortgage.

Advantages of Adjustable Rate Mortgages

The main advantage of an adjustable-rate mortgage is the lower interest rate. Since the rate is based on market conditions, you can get a lower rate than you would with a fixed-rate mortgage. This can save you money on your monthly payments and help you pay off your loan faster.

As mentioned, another advantage of an ARM is that you can take advantage of lower rates if the prime lending rate drops. If the prime rate goes down, so does your interest rate, meaning you can save even more money on your monthly payments.

Disadvantages of Adjustable Rate Mortgages

The main disadvantage of an adjustable-rate mortgage is the potential for higher payments in the future. Since the rate can change over time, your payments can increase if the prime rate rises. This could make it difficult to afford your monthly payments if the rate goes up too much.

Another disadvantage is that you may have to pay a fee if you want to change the terms of the loan. For example, you may have to pay a fee if you want to switch from an ARM to a fixed-rate mortgage.

When an Adjustable Rate Mortgage Might Be the Right Choice

An adjustable-rate mortgage might be the right choice if you are looking for a lower interest rate and don’t mind the potential risks. ARMs can be a good option if you plan to stay in your home for a few years and don’t plan to refinance soon.

ARMs can also be a good option if you are comfortable with the potential risks. You should be prepared for the possibility of higher payments in the future and make sure you can afford the potential increase in payments.

How to Choose the Right Adjustable Rate Mortgage

When choosing an ARM, it’s important to compare different lenders and loan products. Look at the initial rate, the term of the loan, and the prime lending rate the loan is tied to. You should also look at the fees associated with the loan, such as any fees for switching from an ARM to a fixed-rate mortgage.

It’s also important to read the fine print. Make sure you understand all the terms and conditions of the loan and know what to expect if the prime lending rate goes up or down.

Tips for Managing an Adjustable Rate Mortgage

When you have an adjustable-rate mortgage, it’s important to stay informed and manage your loan wisely. Here are some tips for managing an ARM:

• Monitor the Prime Lending Rates to get an idea of what to expect.
• Make sure to keep up with your payments, as missed payments can have a negative impact on your credit score.
• Consider refinancing to a fixed-rate mortgage when the adjustment period is up.
• Consider setting up an escrow account to make sure your taxes and insurance are paid on time.
• Consider setting up automatic payments to make sure your payments are made on time.

Conclusion

An adjustable-rate mortgage can be a great option for homeowners who want to take advantage of a lower interest rate. However, it’s important to understand the risks and be prepared for the possibility of higher payments in the future. Make sure to compare different lenders and loan products, read the fine print, and get a rate lock. With the right loan and management strategy, an ARM can be a great option for saving money and paying off your loan faster.

If you have any questions on an adjustable-rate mortgage, do not hesitate to contact me.  Randell is a Mortgage Broker with DLC BlueTree West Powerhouse Mortgages in Regina, SK.  He can be contacted at 306-541-5438 or at randellt@dominionlending.ca

A reverse mortgage is a mortgage, but it is a special type of mortgage.

A reverse mortgage allows you to access the equity in your home and convert it to tax-free cash.

The cash funds that you receive are not identified as income and can be used for whatever purpose you wish; hence they are received – by you – tax-free …. and you can receive the money as a lump sum or as advances over time.

Regular monthly mortgage payments are not required! One of the terms of the reverse mortgage that makes it a special type of mortgage is that you are not required to make regular mortgage payments to the Lender for as long as your home is your primary residence.

Therefore, if:

• You are a Canadian Homeowner
• Your age is 55 or older
• Plan to remain in your home, and

you need money to relieve financial pressures or increase your cash flows into the home without the demand of regular monthly mortgage payments; all with the peace of mind that you will maintain complete ownership of your home.

Do not hesitate to contact me for a confidential review of your eligibility for a reverse mortgage from Home Equity Bank.

Randell Toporowski is a Mortgage Broker (Lic #508316) with DLC BlueTree West – Powerhouse Mortgages (Lic #316287) in Regina, Saskatchewan. His telephone number is 306-541-5438;  email is randellt@dominionlending.ca

The Bank of Canada Qualifying Rate has been reduced to 5.19% from 5.34%.  This is commonly referred to as the “Benchmark Stress Test” that is used when assessing and qualifying a Borrower(s) for a mortgage in Canada.  This benchmark rate is based upon the Bank of Canada conventional five-year rate and is around 1.50% higher than most mortgage interest rates available through the broker channel.  With all factors being equal a reduction in the qualifying rate means that you can buy more home now than before the change in the rate.

The purpose of establishing a qualifying benchmark is to manage the risk the Borrower is exposed to when purchasing a home.  Namely, the erosion of future cash flows leaving less disposable income to apply towards their mortgage payments.  The monetary policy of the Federal Government and the Bank of Canada set interest rates, economic flow and manages inflation.  In addition to these factors life changing events can reduce available income and risk homeowner solvency.  Life changing events include:

• Replacement of motor vehicle
• Acute or Long Term Illness
• Birth of a Child
• Marriage and Divorce
• Death of a Spouse
• Job Loss, Change and/or Wage Reduction
• Early Retirement
• Move
• Natural Disaster
• College and/or Education
• Income Tax
• Credit Card Debt
• et al

This reduction in the qualifying rate will allow you to purchase more home with your current income.  But I would ask you – will you be happier with 1.4% more home – if you already qualify for a mortgage at 5.34%.

Instead I invite you to challenge yourself and consider this as an opportunity.  An opportunity to set money aside for life changing events that may arise suddenly without forewarning.  Set yourself a plan to prepare for the unexpected events that will cause stress if you have not done so already.  Set the future cash outflows that you would normally have spent on the larger mortgage in an instrument that will generate any return and accessible when you need it, and talk to your Financial Planner for support in this area.

Preserve the cash in your wallet for a rainy day to address life events.

Take the “Stress Test” and turn it on it’s head!, and see it for what it is – a Great Opportunity!

Randell is an Accountant in Private practice and a Mortgage Broker with DLC Powerhouse Mortgages.  If you want to contact Randell he can be reached at 306-541-5438.

Commercial mortgage origination is a process.  It is a multi-faceted process.  It is a detailed process.  The concept of Informed Consent defines a process in which an individual (Corporation) consents to or withholds consent to the various steps in the mortgage origination process.  Informed consent must have the following elements:

• It must be Voluntary
• the Risks, Benefits and alternatives of lending must be disclosed to the Borrower
• the Individual granting consent must be competent, have the capacity to and be of legal age
• Individual (Corporation) must be legally able to contract
• The individual granting consent must be able to do so under the terms of the Corporations Shareholders Agreement and/or Articles of Incorporation
• Borrower must be afforded the opportunity to ask questions
• The questions asked by the borrower must be answered fully and understood by the borrower
• Authorized in a document

The risk?  Poor communication that leads to consent that was not informed!

It is the responsibility of the Commercial Mortgage Broker to support both the lender and the borrower – and act in their best interest.  This means that every Commercial financing request that arrives on a Broker’s desk can be considered complete and substantial once the client has granted informed consent and authorizes such in an appropriate document.  In Saskatchewan, mortgage brokers must comply with both the Statute “The Mortgage Brokerages and Mortgage Administrators Act”, and the Regulations “The Mortgage Brokerages and Mortgage Administrators Regulations”.  These Laws and Regulations detail the items that a Broker must disclose to the client.  They include, but are not limited to:

• The Broker will obtain Corporate, personal and financial information from various sources, including credit bureaus
• Disclosure if a lender has an ownership in the Mortgage Brokerage
• Disclose information to any lender, credit bureau, insurer or insurance agent
• Client agrees to pay all insurance premiums, and that the broker is not responsible for lapse or failure of such
• Client agrees to pay legal, appraisal, registration fees and expenses incurred in connection with this mortgage
• To cooperate with local, Provincial and National authorities in the investigation unlawful or improper activities
• et al

Subject to these disclosures the client should be afforded every opportunity to ask questions and receive answers.  Hence, the consent is informed! And, the client authorizes such by signing the consent and disclosure documents.

Following this, the Commercial Mortgage Broker performs the document review, analysis of the financial statements and determines if the application has commercial substance to support the lending that the borrower is requesting.  The application at this point then becomes a “Go or No Go”, based upon the quality analysis of the documents provided to the Broker.

The risks that exist in Commercial Mortgage Origination must be identified, investigated and explained.  If consent is not informed, it is not consent!

Randell Toporowski is an Accountant in private practice and an Associate Mortgage Broker with DLC Powerhouse Mortgages in Regina, SK.  He can be contacted at 306-541-5438.