Daily Mortgage Tips

Over time, adjustable rate mortgages (abbreviated as “ARMs”) have fallen in and out of favor.  Sometimes, some people love them.  And sometimes, some people hate them.

An adjustable rate mortgage has an interest rate that is fixed for a set period of time (such as 5 years), after which the interest rate can increase by a certain amount every year.  The initial interest rate is often very low, in an effort to “tease” buysers or entice them into thinking that the mortgage may be a good deal since the rate is so low, hoping that they will ignore the fact that it can (and may) increase to a rate significantly higher in the future.

Since the initial rate in an ARM may be significantly lower than that of a fixed rate mortgage (one where the interest rate does not change), it can have some advantages.  For example, if your goal is to “flip” a house (meaning buy it and then sell it shortly afterward for a profit), you may not own the house long enough for the interest rate to go up.  So in this case, you get to pay the lower interst rate for a few months to a few years (however long it takes to sell the house) and then you sell the house for profit and you’re done.  You’ve saved money over a fixed rate loan.

However, if you are unable to sell the house, then an ARM can turn into a bad thing once the rate starts going up.  Other people get ARMs anticipating pay raises in the future.  They think “well, it won’t matter too much if the rate goes up because I’ll have gotten raises by then and be making more money anyway.”  But then if they end up not getting a raise, or even worse, losing their job, then they are in trouble.

Carefully consider all the implications of an ARM before you get one.  Make sure you factor in what may happen if you still own the house after the rates go up.  For more information about different types of Calgary mortgages, please visit the Purcell Mortgage Team.

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