Understand Your ARM

ARM Term Calculation

1st Adjustment Cap: The percent that the rate will change after its initial fixed period.  For example, enter 2% for a loan that will change from it’s initial note rate of 6% to 8%.

1st Change: The number of months the loan will be fixed at the initial  note rate.  For example, if the rate remains fixed for 5 years, enter 60 months.

Adjustment Cap: The maximum percentage that the rate will increase for each sub-sequent adjustment periods after the 1st.  For example, if the rate can only adjust 2 percent on each adjustment after the 1st then enter 2.

Adjustment Period: The number of months between each rate adjustment after the 1st adjustment.  For example, if the rate can only adjust once yearly, enter 12 months.

Life Cap: The maximum percentage that the note rate can rise to.  Enter the difference between the starting note rate and the maximum rate the loan can adjust to.  For example, if the life cap on the loan is 12% and the initial note rate is 6%, enter 6 percent as the life cap.

Margin: The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.  The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest the borrower pays. The margin added to the
index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%.

Index: A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one – three – and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.  The current index in effect would be input into this field. (Source:Calyx Point LOS)