Rates on ARM's are actually fixed for
a period of 1, 3, 5, 7, or 10 years
The rate is calculated on a 30 year amortization term.
It may adjust each year upon expiration of the fixed period you choose:
When considering an ARM be sure to understand:
- Initial Rate
- The Index (LIBOR, T-Bill, etc.)
- The Margin
- The Fully Indexed Rate
IN THIS EXAMPLE WE WILL USE A 5/1 ARM:
Initial Rate = 2.75% (Fixed for the first 5 years)
The rate will fully adjust after five years, here's how:
The Index (typically LIBOR - published in the wall street journal or online) Currently at .60%.
This is the variable part & fluctuates w/ market.
The Margin (this is the fixed part of the fully indexed rate & is set forth by the lender you choose).
For Example: 2.50%
The Fully Indexed Rate = 3.08%
(this means if the rate were to adjust today it would increase by .35%.)
Caps- ARMs are equipped with caps to protect you from major spikes with the Index. For Ex: 5-2-5
No more than 5% over the margin the 1st year
No more than 2% over margin each additional year
No more than 5% over the margin over life of loan.
Major Benefits of an ARM:
- Offers lower initial rates & payments
- Maximizes buying power
- Increases cash flow to invest elsewhere