Question

How do adjustable rate mortgages work? What are the pros and cons of these types of mortgages?

Answer 1

Adjustable rate mortgage is a type of mortgage in which interest rate changes as per relevant benchmark or index. In other words we can say that in case of adjustable rate mortgage, interest rate remain fixed for a certain period of time after which interest rate of loan changes as per relevant index of the market.

Let’s understand it with the help of following example;

Suppose ARM is given 4/28.

In given example number 4 refers to the fixed interest period of 4 years and 28 years refers to floating rate of interest period. In other words we can say that it shows that in first 4 years interest rate will be fixed and for next 28 years interest rate will be adjustable as per relevant indexs and bechmarks.

Thus, it is clear that Adjustable rate mortgage is a hybrid type of mortgage which includes fixed and adjustable interest rates.

Pros of Adjustable rate mortgage;

Followings are the main pros of Adjustable rate mortgage;

1. It will help in saving interest burden in case of lower interest rates in the market.

2. Borrowers will take advantage of affordable monthly payment due to low interest rates.

3. Borrowers will enjoy advantages of flexibilities of the market.

4. Borrowers can get flexible payment options under adjustable rate mortgage etc.

Followings are the main cons of Adjustable rate mortgage;

1. In case of rising interest rate in the market, it will create more interest burden on the borrowers.

2. Adjustable rate mortgage is much complex for the borrowers due to complexities in the calculation process.

3. It will result into higher monthly payments for the borrowers.

4. For borrowers, financial planning is not easy work because due to market fluctuations.

5. It will lead to higher payment for purcahsed prooperty due to higher interest payments etc.