Adjustable rate loans or ARMs, when pertaining to commercial real estate, are ideal for borrowers who expect rates to go down or those who prefer the flexibility of a short-term loan. Like any ARM instrument, the interest rate changes periodically according to an index that is selected when the mortgage is issued.
With an ARM (Adjustable Rate Mortgage), you might qualify for a larger loan and your ARM could be less expensive than a fixed-rate loan over a long period. An adjustable rate loan is most beneficial to the borrower when the interest rates go down since their monthly payment will usually decrease as well. The only downside is that if the interest rates go up, the monthly payment could rise along with the rates.
There are a variety of loan programs you can choose from:
- Easy in/easy out
- Variable-rate/convertible loan
- Adjustable rate with a future option to increase loan
- Simple interest loans with or without graduated payments
To compare one ARM with another or with a fixed-rate mortgage, you need to know about indexes, margins, discounts, cap structures, negative amortization and convertibility.