Did you know there are two types of variable interest rate product mortgages? Today’s blog explores the differences between Variable Rate Mortgages (VRMs) and Adjustable RateMortgages (ARMs), which are often confused. Let’s break down the key differences in a simple and clear way.

With a Variable Rate Mortgage, your monthly payments stay the same, even if the prime rate changes. This stability can help with budgeting and financial planning. However, even though your payments stay the same, the portion allocated toward interest versus principal may fluctuate based on changes in the prime rate.
You may have heard about banks with VRMs facing challenges after the pandemic. When the prime rate rose sharply, these banks had to consider increasing monthly payments to manage higher interest costs. However, the fixed payment structure meant borrowers had to extend their mortgage terms, leading to longer amortization periods. This example underscores the importance of understanding how prime rate changes can impact VRMs.

On the other hand, an Adjustable Rate Mortgage adjusts your payments according to changes in the prime rate, offering greater flexibility. ARMs usually have a fixed rate for the first 3 months. After the fixed period, the rate adjusts monthly or quarterly based on changes to the prime rate. Your payment changes with the prime rate. If the prime rate decreases, your payments may drop, providing potential savings.
Choosing between a VRM and an ARM depends on your client’s financial situation and risk tolerance. VRMs are ideal for clients who prefer consistent, predictable payments without worrying about fluctuations. ARMs may suit clients who are comfortable with payment changes and want to potentially benefit from a decrease in the prime rate.

To help clients make the best decision, consider these factors:

• Risk Tolerance: Does your client prefer predictable payments, or are they comfortable with fluctuations?

• Long-Term Plans: How long do they plan to stay in the home? ARMs might be a better option for those planning to move or refinance soon.

• Market Conditions: Take into account current and future interest rate trends when advising your client.

By understanding the differences between VRMs and ARMs, you’ll be better equipped to guide your clients through the mortgage process. If you have any questions or need further details on this topic—or any others—please don’t hesitate to reach out!

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