1 Year Arm, 3 Year Arm, 5 Year Arm, 7
Year Arm and 10 Year Arm
How do
they work?
As with all Adjustable Rate Mortgages (ARMs),
the rate is tied to a certain index –
most commonly the monthly average of
Treasury securities with a constant
maturity of one year. For the initial 1,
3, 5, 7, 10,-year period, your rate is
fixed. Then after the initial fixed
period the loan will follow the movement
of this index up and down, with certain
limits. As a rule the lower the start
rate the shorter the time before the
loan makes its first adjustment. See
Adjustable rate mortgage
What are the
benefits of an ARM?
ARMs allow you to pay a lower
introductory interest rate. They help
borrowers qualify for a larger home and
enjoy a lower initial monthly payment.
Example:
3-Year Treasury ARM
|
Index |
|
Treasury |
|
First Adjustment |
|
After three years |
|
First Adjustment Cap |
|
2% Maximum |
|
Periodic Adjustments |
|
One per year after third
year |
|
Periodic Adjustment Cap |
|
2% |
|
Lifetime Cap |
|
6% above initial rate |
|
Margin |
|
2.75% |
Index: is the published financial
reference to which your loan is tied.
The index is published in newspapers and
is readily available on the internet.
First Adjustment: is the first
time the lender has the option to adjust
your rate.
First Adjustment Cap: is the most
your interest rate can increase at the
first adjustment.
Periodic Adjustments: are the
frequencies with which your interest
rate can be increased.
Periodic Adjustment Cap: is the
most your interest rate will increase
with each Periodic Adjustment.
Lifetime Cap: is the maximum
interest rate that can be charged during
the life of a loan.
Margin: is added to the index to
determine the rate adjustment.
Buying A Home
