Adjustable Rate Mortgages
Some specifics on ARMS

 

bulletAdjustable Rate Mortgages are stable for a specified period of time.
bulletARMs are set or amortized to pay off in 30 years.
bulletAfter that stable or level payment period, your loan has the possibility of; remaining the same, increasing in rate and payment, or decreasing in rate and payment.
bulletARMs are associated or “tied” to a specific index and include a margin. The index rates are usually published in the financial section of the Wall Street Journal and many other financial periodicals.
bulletAn index is a posted interest rate based on a specific financial measurement. Examples of indexes may be; a yield of US Treasury Notes, or LIBOR rates, (London Inter-bank Offered Rate), or perhaps a COFI, (Cost of Funds Index) index.
bulletA margin is a lender specific ‘add on’ to the index. The adding of the index + the margin will be your actual rate. Index + margin = rate. For example, if the LIBOR index is 1.3 and the lender margin is 2.25, that rate, index & margin equals 3.35%.
bulletA start rate is simply the rate where your loan begins.
bulletARMS Adjust! It is important to become knowledgeable about how and when your loan may adjust over time.

Here are some questions that you should consider.

bulletWhat is the maximum amount of adjustment that your loan can have on the first adjustment?
bulletWhat is the maximum adjustment that your loan will change with each adjustment there after?
bulletWhat is the lifetime cap or interest limit that your loan can take?
bulletHow often can your ARM loan adjust?

For Example: 5.5% 5-year, “6 Month LIBOR” 6,2,6 ARM. This tells you; that this loan is locked in at the rate of 5.5% for a period of 5 years and can adjust after the 5th year. The first number is the maximum of the first adjustment based on the starting interest rate and is calculated on whether your rate has moved up or down. For our example it can increase to an additional 6.00% above your initial 5 year locked rate of 5.5%. Thus, the worst case scenario for this loan would be, 5.5% + 6.00% which would yield an adjusted interest rate of 11.5%. Your new payments would be based on this higher interest rate. Again, this is the maximum that your loan may change on the first adjustment. Remember that this is an adjustment and it may adjust down if interest rates drop at a later date.  Sounds like a ruinous risk? Let's look at the numbers together and then you can decide.

The next number listed, 2, refers to the maximum interest rate increase, if any, that can occur after the first adjustment, if the loan has not hit the maximum adjustment (see above), per adjustment period. The name of the index, “6 Month LIBOR” tells you that it is reviewed by the lender for an increase or decrease in rate every 6 months. Therefore after your initial adjustment, your loan can increase or decrease by a maximum of 2% in interest after each review of the LIBOR rate on a 6 month basis. It sounds complicated, but feel free to call me and I can help you if you need more detail.

The final number, 6, is the life of loan maximum rate increase, from the initial starting rate that could occur.

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