Adjustable-rate mortgage

Adjustable-rate mortgage

An adjustable-rate mortgage, or ARM, is one of the alternatives available to borrowers in the world of mortgages. The variable interest rate on an ARM changes regularly depending on specified parameters. This flexibility can positively and negatively affect borrowers’ monthly payments and long-term financial objectives. For those navigating the mortgage market and looking for a financing option that fits their unique requirements and circumstances, it is essential to comprehend the subtleties and concerns of adjustable-rate mortgages. 

What is an ARM? 

An adjustable-rate mortgage ARM is a mortgage where the interest rate can change over time. An ARM has an initial fixed-rate period, often lasting from a few months to several years, after which the rate changes regularly depending on a predetermined index, in contrast to a fixed-rate mortgage, where the interest rate is fixed for the duration of the loan.  

The loan’s terms will determine the adjustment time and frequency, which implies that, depending on changes in the underlying interest rate index, the borrower’s monthly mortgage payments may alter, either going up or down. 

Understanding ARM 

ARMs are home loans with interest rates that fluctuate throughout the loan. An ARM typically begins with an initial fixed-rate term where the interest rate is set. A defined index, such as the 1-year treasury constant maturity rate, is used to modify the interest rate regularly after the initial term. The loan conditions specify the restrictions and adjustment frequency. The interest rate and monthly mortgage payment may increase or decrease as the index changes. ARMs provide flexibility, but rising interest rates could result in larger payments. 

Types of ARMs 

The following are the types of ARMs: 

  • Hybrid ARMs 

A hybrid ARM’s initial fixed-rate term, which normally lasts three to 10 years, is followed by an annual rate adjustment. 

  • Interest-only ARMs 

Borrowers who choose interest-only ARMs can choose to pay just the interest part of the loan for a certain time frame, usually 5 to 10 years. The loan changes from an interest-only period to a fully amortising ARM afterwards. 

  • Option ARMs 

Option ARMs allow borrowers to select the size of their monthly payments. They frequently provide a variety of payment alternatives, such as a minimum payment, an interest-only payment, or a payment that fully amortises the debt. 

  • Balloon ARMs 

Balloon ARMs feature an average fixed rate period lasting 5 to 7 years, followed by a sizable final payment after the loan term. 

  • Cash flow ARMs 

Cash flow ARMs allow borrowers to adjust their payment amount based on changes in their income. 

Advantages and disadvantages of ARMS 

The following are the advantages of ARMs: 

  • ARMs usually have lower starting interest rates than fixed-rate mortgages, which can result in lower monthly payments during the first few years of the loan. 
  • The borrower’s monthly payment may drop if interest rates reduce over time when the rate is adjusted. 
  • Some ARMs offer borrowers the alternative of making interest-only payments or various payments, giving them more flexibility in controlling their cash flow. 

 

The following are the disadvantages of ARMs: 

  • Since ARMs are sensitive to interest rate changes, the borrower may see an increase in monthly payments if rates rise, which might result in higher total expenditures. 
  • Borrowers may need more certainty due to future interest rate modifications, making planning and budgeting for subsequent payments difficult. 
  • Borrowers may see a big increase in their monthly payments if interest rates rise dramatically, which might burden their finances. 
  • The borrower’s refinancing alternatives may be restricted or experience higher rates if they want to remain in the house after the first fixed-rate period. 

Example of an ARM 

A 5/1 ARM is an example of an adjustable-rate mortgage. The first fixed-rate term in this example is five years when the interest rate will not fluctuate. Following the initial time, a yearly adjustment to the interest rate is made by a predetermined index, such as the yield on US Treasury bills.  

For instance, if the starting interest rate on a 5/1 ARM is 3%, that rate will be set for the first five years. After then, it may change yearly following the selected index. The change may cause the interest rate to go up or down, impacting the borrower’s monthly mortgage payment. 

Frequently Asked Questions

The main difference between an ARM and a fixed-interest mortgage is that the interest rate of an ARM can change over time, while the interest rate of a fixed-interest mortgage remains constant for the entire loan term. 

ARMs can be a good investment option for some homebuyers, depending on their financial situation and goals. ARMs typically offer lower interest rates and monthly payments initially, which can be attractive to those looking to save money in the short term. However, it’s important to remember that the interest rates on ARMs can adjust over time, potentially resulting in higher monthly payments. Your level of risk tolerance, financial objectives, and long-term plans will determine if an ARM is right for you. 

ARM loans provide a starting fixed interest rate for a predetermined time. The interest rate is periodically adjusted after the initial fixed-rate period based on an index and a defined margin. The loan conditions outline the adjustment frequency, index, and margin. The margin is added to the index value to determine the new interest rate. This modification may result in higher or reduced monthly mortgage payments depending on how the index changes. 

People seeking lower initial mortgage payments, anticipating changing interest rates, or planning to stay in their houses for a shorter time may be good candidates for ARMs. 

ARMs sometimes feature rate adjustment caps, which set a ceiling on how much the interest rate can rise at certain times. These restrictions, which ensure the rate increase is steady and within specific limits, can be categorised as yearly, periodic, and lifetime caps. 

    Read the Latest Market Journal

    Navigating the Post-Inflation Landscape in 2024: Top 10 US Markets Key Events to Look out for

    Published on Feb 23, 2024 64 

    Start trading on POEMS! Open a free account here! In 2023, the United States experienced...

    From Boom to Bust: Lessons from the Barings Bank Collapse

    Published on Feb 23, 2024 21 

    Barings Bank was one of the oldest merchant banks in England with a long history...

    Decoding FX CFD 2.0

    Published on Feb 20, 2024 63 

    This article is aimed at availing information and knowledge essential to intermediate forex traders. It...

    Weekly Updates 19/2/24 – 23/2/24

    Published on Feb 19, 2024 84 

    This weekly update is designed to help you stay informed and relate economic and company...

    Unlock Prosperity with 5 Sure-Fire Financial Instruments!

    Published on Feb 14, 2024 191 

    In Singapore, the concept of guaranteed returns may evoke the spirit of prosperity, reminiscent perhaps...

    Weekly Updates 12/2/24 –16/2/24

    Published on Feb 13, 2024 69 

    This weekly update is designed to help you stay informed and relate economic and company...

    Decoding FX CFD

    Published on Feb 7, 2024 97 

    The foreign exchange market commonly known as the forex or FX market, is a cornerstone...

    Chinese New Year: Three Cases For CFD Trading

    Published on Feb 6, 2024 141 

    The Chinese New Year is a festive season may be celebrated by some parts of...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com