Adjustable Rate Mortgage (ARM) loans: Limitations and benefits

Taking advantage of ARMS can involve complex issues. Photo: Wikimedia commons.

MANILA, March 27, 2013 – Only about one-third of mortgage loan borrowers purchasing real estate today resort to signing up for adjustable-rate plans. These are otherwise standard mortgages, except that the interest rate is not fixed for the term of the mortgage. Rather, the interest rate is periodically adjusted, a feature described more fully in an article appearing in

Yet before taking out a conventional, fixed-rate mortgage loan, which has a consistent interest rate through the term of the loan, a majority (around 70%) of borrowers do take the time to compare the two by looking into what an adjustable rate mortgage loan’s limitations and benefits might bring into their home financing situation. 

SEE RELATED: Walkable neighborhoods increase real estate demand, an online resource site about loans, taxes, debt management, investments and personal finance, points out that mortgage loans with variable rates charge much lower initial interest rates at present than mortgages at a fixed rate. The lower rates on interest rates give homeowners the option to either pay for a bigger mortgage or acquire a larger property. Loans with adjustable interest rates have actually adjusted interest rates down recently in many cases, due to lower interest rates reflecting the monetary policies of many governments. 

Unfortunately, as many investors and homeowners discovered at the outset of the 2008-2009 financial panic, such rates can also adjust upward causing severe financial distress on the part of owners or owner occupants who found themselves unprepared. It works both ways. However, the current environment is relatively benign for those who wish to explore adjustable mortgage products. 

Those who are assigned to work in another location for a few years—like people in the military or those who are sent as expats by the international companies that employ them—as well as those who simply plan to stay in their home for only a couple of years, might still find this type of mortgage loan more fitting for their situation. A loan like this would allow them to pay cheaper rates during a defined period of time before that loan’s interest rate adjustment ratchets higher, becoming similar to the rates charged for current, fixed mortgage loans.

In addition, mortgage loans with adjustable rates have a yearly and lifetime interest rate limits or “caps” which prevents the rate from rising beyond a certain amount regardless of realty market value and interest rate fluctuations. 

SEE RELATED: Epic guide to buying condominiums in the U.S.

CanDofinance also discusses so-called hybrid adjustable mortgage loans, which again could benefit those who want to buy properties under certain circumstances. Borrowers with this type of loan pay interest at a fixed rate for a few years, and then have to pay a variable, usually annually adjusting rate after the mortgage loan from its time-limited fixed rate.

The disadvantage of this kind of adjustable rate mortgage loan is that interest rates also tend to rise when the real estate market’s value is growing, causing the borrowers’ initial adjusting rate (following the fixed term) to increase significantly, possibly wiping out anything they might have previously gained under the temporary fixed term.

“Annual caps” cannot protect them from this kind of increase. Also, this is not a suitable route for those who plan to keep their homes for much longer periods of time because interest rates in these situations could eventually rise much higher than the prevailing fixed rate mortgages that might have been available when the home was initially financed. 

For all the positives that currently exist for various adjustable rate mortgage products, one only has to look back on what happened to similar products when interest rates worldwide spiked not too many years ago, causing massive foreclosures and short sales in the real estate markets of many countries, including the U.S. So the best advice as always when considering innovative products such as the adjustable rate mortgage, is to be very much aware of your own five-to-ten year financial and ownership timeframe and choose the lowest-risk product that conforms to your short-to-intermediate term financial plan.


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Jona Jone

Jona Miranda Jone brings her expertise to the Communities page as a financial writer who is also an expert on mortgages and other transactions concerning property ownership.  Jona now lives in the Philippines, where she works as a freelance writer.

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