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You likely know the difference between fixed and variable-rate mortgages, but what about mortgages with static vs adjustable payments? Variable-rate mortgages can either have static payments or adjustable payments. This distinction is important because it affects how quickly you may pay off your mortgage, and how your payments may change each month. We’re here to discuss the adjustable rate mortgage (ARM) as an option for your variable rate. Here’s what you need to know about this type of mortgage.
Static vs adjustable variable-rate payments
With a variable-rate mortgage, borrowers will either make static or adjustable payments. With static payments, a borrower’s variable rate and monthly mortgage payment will not change during the mortgage term, but it can change whenever the mortgage “resets” and will then reflect any changes that have been made to the prime rate. For example, if the prime rate increases in the middle of your static variable-rate mortgage term, your payments will not increase unless your term resets. With an adjustable rate, your payments are up-to-date with prime rate changes and your payments will change accordingly, regardless of where in your term you are. If the prime rate goes up or down, so will your mortgage payments.
Benefits of the adjustable rate mortgage
There are a couple big advantages to having an adjustable rate mortgage. First is the fact that your payments will vary with the prime rate, moving up and down as the prime rate does so. This means your mortgage payments will reflect the state of the economy and automatically change alongside the prime rate. With static payments, mortgage payments remain the same throughout the term and will only change when the term ends. With adjustable payments, you will immediately see those changes reflected in your payments. This means your amortization schedule will stay on track, allowing you to ensure you are maintaining pace to paying off your mortgage on time.
For example, if the prime rate increases and your payments immediately increase, you are caught up right away. With static payments, your payments won’t increase until the term ends, putting you a bit behind schedule. Adjustable rate mortgage payments make sure you pay off your mortgage as soon as you can. Finally, these up-to-date changes mean you will never be surprised when your term ends and your payments “reset.” Borrowers with static payments on a variable-rate mortgage may find that when their term resets, and they suddenly owe more each month thanks to prime rate increases, they are caught off guard by how much their payments have gone up. An adjustable rate mortgage prevents these shocks.
Are there downsides?
Do adjustable payments on a variable rate have any big drawbacks? The biggest downside to adjustable payments is it can be tricky to keep up with changes in your payments if they are often increasing. These days, they would be, with the Bank of Canada raising rates. It can be hard to budget for these changes when you don’t know exactly how much your payments may increase within a few months. Since home owners have other financial obligations, like utilities, taxes, credit cards, groceries, etc., it can put a bit of stress on their other payments. It’s very important to have a clear plan and understanding of where interest rates are heading, and if they increase, how much that might affect your payments. You can speak to a broker about interest rate trends and what you should prepare for with an adjustable rate.
In general, we believe adjustable rates are a good option for many home owners looking to pay off their mortgage with their intended amortization schedule. Although the changes to your payments can feel stressful, mortgage professionals can help you make sure you can handle higher payments if that’s the way the market is turning. It’s important to note that not all lenders offer adjustable rate mortgages, so your options may differ depending on your lender. If you think an adjustable rate would be good for you, we can work to find a lender who can meet your needs. Reaching out to a broker is a good first step in determining whether an adjustable rate mortgage is the right path for you.
If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.