Are Adjustable-Rate Mortgages (ARMs) Worth It in Kitchener's Current Market?
Are Adjustable-Rate Mortgages (ARMs) Worth It in Kitchener's Current Market?
When obtaining a mortgage in Kitchener, homebuyers often have one question on their mind: should they get a fixed-rate mortgage or should they choose an adjustable-rate mortgage (ARM) given today’s market?
This decision will ultimately have a significant impact on your financial future, especially given the fluctuating rates in Kitchener. At Swift Borrow, we will explain everything about ARMs, how they work, and whether they are a wise pursuit for homebuyers in Kitchener. Additionally, we will discuss the benefits of working through a Kitchener mortgage agent or using a mortgage broker in Kitchener.
What is an Adjustable-Rate Mortgage (ARM)?
This adjustable-rate mortgage refers to a home loan where the interest rate changes periodically depending on market changes. The fluctuations can arise from a financial index or benchmark like the prime rate.
Here, the monthly payments of ARM increase or decrease over time. The ARM offers a lower initial interest rate compared to fixed-rate mortgages. However, there is a level where uncertainty is involved. The rates can rise, which eventually affects your payments.
How Do ARMs Work?
An adjustable-rate mortgage (ARM) normally has a fixed interest rate for an initial period, which can last for several years, usually 3, 5, 7 or 10. After the initial fixed period, the interest rate on the mortgage will adjust once a year after that, depending on current market conditions. A 5/1 ARM would have an interest rate that was fixed for the first five years, and then would change yearly thereafter.
Although the lower starting interest can be alluring, it is also important to understand that this reduces the barriers to interest rates increasing in the future. If mortgage rates in Kitchener increase substantially, your monthly payment may increase too. However, when evaluating the benefits and drawbacks of this type of mortgage, Kitchener’s mortgage specialists often consider whether your finances are stable or in turmoil.
Why Consider an ARM in Kitchener’s Current Market?
In Kitchener, the real estate market experiences a steady increase in home prices. However, the mortgage rates in Kitchener fluctuate, and many buyers search for different ways to reduce the monthly payments. Here, ARMs are beneficial in the following ways:
Lower Initial Interest
Rates
One of the main benefits of an ARM is its lower initial interest rate, which can help you save money during the early years of the loan. This can be particularly advantageous if you plan on selling the home or refinancing before the rate adjusts.
For instance, if you are working with a mortgage broker in Kitchener or a mortgage agent in Kitchener, they can help you explore ARMs that offer competitive rates during the fixed-rate period.
Potential for Lower Payments in the Short Term
If you’re only planning to stay in the home for a few years, an ARM might be a good option because the initial fixed-rate period can result in significantly lower payments compared to a traditional fixed-rate mortgage.
In this case, the best mortgage rates in Kitchener-Waterloo may be available through ARMs, especially if interest rates are relatively low at the time of securing the mortgage.
Long-Term Savings (If Rates Remain Stable)
While ARMs come with the risk of rate increases, if interest rates remain stable or even decrease in the future, your mortgage payments could stay lower than those of a fixed-rate mortgage over time.
Consulting with a mortgage broker in Kitchener-Waterloo or a Kitchener mortgage agent can help you predict potential rate changes based on market trends.
The Risks of ARMs
There are different advantages of ARM, and it’s essential to understand the risks involved. It depends on Kitchener’s fluctuating mortgage market-
Potential for Rising Interest Rates
The biggest risk with an ARM is that the initial fixed rate period is over, and the rate may increase. Although you could make larger monthly payments with an ARM, your monthly payments might considerably rise, making budgeting more challenging.
If current mortgage rates in Kitchener at that time had spiked, you may be paying much more than you anticipated. Kitchener-Waterloo mortgage brokers will advise you on how to calculate possible future costs so you are prepared.
Payment
Uncertainty
You can use your home buying experience in an ARM against a fixed mortgage, where you can plan for your monthly payments. With ARMs, you can plan your monthly payments, but with ARM, your payments can change.
If your payments increase more than you predicted, then the unpredictability of the ARM will make it difficult for you. It can leave you financially stressed if you have very little to spare in your budget.
If you are looking to assess your long-term financial future, find a mortgage specialist in Kitchener to help you determine whether you should even consider an ARM.
Risk of Negative Amortisation
Sometimes, ARMs can give rise to negative amortisation, where monthly payments do not cover the interest due. It results in a higher balance on the mortgage loan due to accrued interest. This can be alarming if you plan on staying in the property for a certain amount of time.
Should You Choose an ARM in Kitchener?
Whether you choose to use an ARM or not is up to your situation and plans. Here are a few questions to consider:
- How long do you plan to live in your home? If your timeframe is short, an ARM could yield considerable savings.
- Are you okay with the potential rate increases? Someone who frequently worries about rate increases and not knowing how much their monthly payment is going to be is unlikely to be comfortable with a rate that could increase.
- What are mortgage rates in Kitchener currently like? If rates are low or likely to stay steady, a flexible ARM might provide a great opportunity to have a low initial rate for the first few years.
Consulting with a Kitchener mortgage agent or a mortgage broker in Kitchener can give you a perspective on how to assess your best options.
Wrapping up
With so many mortgage options available, choosing the correct mortgage option can be challenging. When deciding between fixed-rate and adjustable-rate mortgages (ARMs), you may not know which one to choose. So, that is where Swift Borrow comes in. Our team of Kitchener mortgage agents and mortgage brokers in Kitchener are available to help you sort through these decisions and get to a point that fills your needs. If you’re looking for the best mortgage rates in Kitchener-Waterloo or trying to get mortgage rates in Kitchener, Swift Borrow has you covered!
Don’t be afraid. Call Swift Borrow today and talk to a Kitchener mortgage specialist and plan your ideal mortgage. There may be months in delay, we realise that it’s a rapidly changing market situation, and we don’t have time to waste. Together, we can meet your goal successfully.
