When home buyers go shopping for the best Adjustable Rate Mortgage (ARM) they can find, these are the 16 essential things they should ask about:

1. The initial interest rate or "qualifying" rate.
2. The length of time the interest rate and monthly payment will remain the same as at the start. Also the length of time between rate and payment adjustments.
3. The index to which the ARM is keyed (Treasury bills, etc.)
4. The current index level.
5. The margin percentage between the index and the mortgage interest rate.
6. How the index and margin are combined to arrive at a loan interest rate (both initial and adjusted rates).
7. The adjustment (if any) to be made in interest rate and monthly payment, if the index remains the same.
8. Whether or not the loan has an interest rate cap (limit). If so,
   1. the limit to the increase in the interest rate at the time of each adjustment,
   2. whether or not there is a carryover to the next adjustment period of any increase in the index rate that goes over the specified limit, (that is, can increases be applied in subsequent years when the rate increase is below the cap), and
   3. whether or not a periodic rate cap applies to the first adjustment and/or rate decreases.
9. Whether or not a life-of-the-loan interest rate cap is available. If so, the minimum and maximum rates.
10. Whether or not a periodic payment cap is available. If so, ask about:
    1. the maximum monthly payment increase possible at any adjustment, and
    2. the payment cap, does it apply to the first payment adjustment?
11. The initial annual percentage rate (APR) of the loan, which may fluctuate in later years.
12. In case of negative amortization, how often the loan is recast to pay off the increase in principal. After recasting, the limit (if any) on the amount of increase in payment.
13. Whether or not negative amortization may occur if an interest rate increase causes a monthly payment to accrue over the cap limitation. Whether or not the payment cap applies to any increase caused by periodic recasting of the loan because of negative amortization.
14. Whether or not the loan can be assumed by a future buyer. If assumable,
    1. the qualifications involved, and
    2. whether or not the original interest and payment caps will hold. If not, the specifications for new caps.
15. Whether or not the ARM can be converted to a fixed-rate loan at any time.
16. Whether or not the loan has open-end credit.

If you would like a further explanation of ARM features, give us a call or send an e-mail question. We'll be glad to discuss this sometimes-complicated subject with you.

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