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De-Mystifying ARM Adjustment

October 7th, 2007 12:19 PM by Sam Kader

In order for you to calculate what your Adjustable Rate Mortgage will adjust to, you need to find out the following items:

  1. What the Index is. This could be COFI, Libor, CMT, CODI, and Prime Rate. Then check out from this website to ascertain what your current Index value is.
  2. What the margin is. This is usually fixed for the duration of the loan and could vary from .75% to 7%. 
  3. What the adjustment cap is. 
  4. What the lifetime maximum rate adjustment is.  

Example 1.

If your current ARM is 3%, Index Rate is 5%, Margin is 3%, Adjustment Cap is 4% and Lifetime Adjustment Cap is 12%. Then the new rate is 7% (Current + Adjustment Cap). 

Example 2.

If your current ARM is 5%, Index Rate is 5%, Margin is 3%, Adjustment Cap is 4% and Lifetime Adjustment Cap is 12%. Then the new rate is 8% (Margin + Index).

Example 3.

If your current ARM is 6%, Index Rate is 5%, Margin is 8%, No Adjustment Cap and Lifetime Adjustment Cap is 12%. Then the new rate is 12% which is the maximum Lifetime Adjustment.

In the above examples, we are to consider the lower of the two from the following calculations:

a) Current Rate + Adjustment Cap or

b) Margin + Index.

Please shot me an email or call me if I can assist you further.

 


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