Adjustable Rate Mortgages

  Variable or adjustable loan is loan whose interest rate, and

  accordingly monthly payments, fluctuate over the period of

  the loan. With this type of mortgage, periodic adjustments are

  made to the interest rate based on changes in a defined index,

  such as the Treasury Bill or Prime Rate. The index for your

  particular loan is established at the time of application.

  The margin is a number of fixed percentage points added to

  the index to compute the interest rate. The result will then be

  rounded to the nearest one-eighth of a percent.

 

  Example:

  The index is 2.3% and the margin is 2.5%,

  then the new interest rate = 2.3% + 2.5% = 5.8%.

  The nearest to 0.8% is 0.75% = 6/8%.

  The result will be 5.75%.

  The margin remains fixed for the term of the loan and is not

  impacted by the financial markets and movement of interest

  rates. Lenders use a variety of margins depending upon the

  loan risk and adjustment periods.

  Most ARMs have an adjustment as well as lifetime interest rate

  caps to protect you from enormous increases in monthly

  payments. A lifetime cap limits the interest rate increase over

  the life of the loan. A periodic or adjustment cap limits how

  much your interest rate can rise at one time.

  For example, a 3/1 ARM with 2/6 caps will have an initial

  three year term without adjustment.  If the start rate is 4% then

  on the 37th month it will adjust, but can adjust no higher than

  6%.  It will adjust again on the 49th month, but can go no

  higher than 8%.  If again rates have risen, on the 61st month it

  will adjust up again, no higher than 10%, where it will have

  hit the cap.  So if once again market rates have risen, on the

  73rd month it will remain at 10%, and will climb no higher. 

  Your mortgage disclosure will tell you the exact index, to be

  used, whether the weekly or monthly value applies, the lead

  time for your index, the margin, and any caps.