Adjustable Rates

      ARMs – All ARMs are the same right?  There are just different interests.  Well the truth is not so fast.  ARMS are fixed for the number of years represented by the first number and may adjust after the fixed period based on the second number.  So a 5/1 ARM is fixed for 5 year and could adjust once every year after that.  A 5/6 ARM alternatively could adjust every 6 months after the fixed period.  The rate to which they may adjust is based on an index and a margin.  The index is variable and the margin is fixed.  There a myriad of indices on which the changes could be based.  The most common ones are the LIBOR and the U.S. Treasuries.  Even among those there are various durations upon which they could be based (e.g. 1 month, 1 year etc.).  The margin is arbitrarily chosen by the lending institution.  The margins normally range from 2.25 to 2.75.  Currently a one year LIBOR is about .8%.  A loan with that index and a 2.5 margin would be priced at 3.30% (the sum of the two) and rounded up to the nearest 1/8^th of a percent or 3.375%.  Another feature of ARMS that is important to look at is the adjustment periods.  They too vary among competing products.  Adjusters are comprised of three numbers separated by slashes.  The first number is the maximum percent by which the interest rate could increase or decrease at the loan’s first adjustment period.  The second number is the maximum the rate could change at any subsequent adjustment period and the third represented the maximum or minimum that loan could change during its terms.  Therefore a 2/2/5 loan would be a better product than a 2/2/6 and also better than a 5/2/5.