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Adjustable Rate Mortgage

3/1 Adjustable Rate Mortgage (ARM)

This type of loan has monthly payments that are based on a 30 year repayment schedule and the interest rate remains fixed for the first 36 months (three years). After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). This is referred to as the "adjustment period". The new rate is based upon fluctuations in an index (typically the One Year Treasury Security) and is calculated by adding a specified amount to the index. The amount that is added to the index is called the "margin" (typically 2.50% - 3.00%). For example, if the index equals 5.0% at the time of adjustment and the margin equals 2.75%, the new interest rate would be 7.75%. However, this type of loan program usually has limits on how much the interest rate can change (either up or down) at each adjustment date, compared with the interest rate being charged before the new adjustment is made. Typically, this limit is 2% and is referred to as an "adjustment cap". There is also a limit as to how much the interest rate can change (either up or down) from the initial interest rate over the entire life of the loan (typically 6%) and this is referred to as a "lifetime cap". The monthly payment changes, as needed, at each adjustment period, to reflect the adjusted rate.

5/1 Adjustable Rate Mortgage (ARM )

This type of loan is similar to the 3/1 ARM except for the fact that the interest rate remains fixed for the first 60 months (five years) as opposed to the first 36 months. After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). As with a 3/1 ARM, the index is typically the One Year Treasury Security index, the margin is typically 2.50% - 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%.

7/1 Adjustable Rate Mortgage (ARM)

This type of loan is similar to the 3/1 ARM except for the fact that the interest rate remains fixed for the first 84 months (seven years) as opposed to the first 36 months. After that time the interest rate (and, therefore, the monthly payments) may change every 12 months (one year). As with a 3/1 ARM and a 5/1 ARM, the index is typically the One Year Treasury Security index, the margin is typically 2.50% - 3.00%, the adjustment cap is typically 2% and the lifetime cap is typically 6%.

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