# A Brief Tutorial on Adjustable Rate Mortgages (ARMs) in THREE easy steps!

By
Real Estate Mortgage Broker with KMG Mortgage Group - Kevin & Maryellen, Idaho & Washington

A Brief Tutorial on Adjustable Rate Mortgages (ARMs) in THREE easy steps!

STEP 1:

You typically see ARMs advertised as follows:

1/1, 3/1, 5/1, 7/1, 10/1
or
3/6, 5/6, 7/6, 10/6

What does this mean?  In the former's case (3/1, for example), it means the loan is FIXED for the first 3 years and adjusts every 1 year after that.

In the later's case (3/6 for example), it means the loan is FIXED for the first 3 years and adjusts every 6 months after that.

STEP 2:

Index + Margin = New Interest Rate

Every ARM is linked to an Index at the time of origination.  Some to the U.S. Treasury, some to the LIBOR.  These indexes change frequently.  Furthermore, every loan is given a Margin at time of origination.  This margin is a FIXED number and does NOT change.  Add these two together and you get your new interest rate.

STEP 3:

All ARMs have CAPS, usually written as follows:

2/2/6
or
5/2/5

What does this mean?  The first number is the greatest your rate can adjust at the initial adjustment.  The second number is the greatest your rate can adjust at any subsequent adjustment period.  The final number represents the greatest adjustment over the life of the loan.

* * * * * * *

We will use my real life ARM as an example:

• In March 2008 I got a 3/1 ARM with 2/2/6 CAPS with an initial interest rate of 4.875%.
• My loan is due to have its first adjustment in April 2011.
• If my rate goes up at this point, it CANNOT go higher than 6.875%.
• My loan will then adjust every 12 months after that, with the second adjustment being April 2012.
• Over the life of the loan, however, my rate CANNOT go higher than 10.875%.

* * * * * * *

I know what you're thinking!  10.875% - eegad!!!!!!!  And, you're right.  Outrageous!

But, I have an ARM and my rate is about to go down!

Mortgage Broker
KMG Mortgage Group
(208) 664-3600
(509) 638-3455
www.kmgmortgagegroup.com

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Topic:
Lending / Financial
Groups:
Coeur d'Alene and the Inland Northwest
Mortgages
Realtors Needing the services of the Lending Powers
Spokane, Eastern Washington & North Idaho Real Estate Network
Spokane Real Estate
Tags:
arms
finding the right loan for you
shopping for the best loan

Rainmaker
597,680
Donne Knudsen
CalState Realty Services
Los Angeles & Ventura Counties in CA

Maryellen - As I stated in your other post, ARM's are not for everyone or every situation.  However, if done properly, they can be the right loan for many situations.  Hubby and I also have an ARM and like you, am glad that we did what we did when we did it.

When considering an ARM, the borrower just needs to make sure that they are getting the best advice for their situation and that their mortgage professional explains both the advantages and disadvantages of this particular type of product.

March 02, 2009 08:35 pm
Rainer
38,644
KMG Mortgage Group - ID & WA
KMG Mortgage Group - Kevin & Maryellen, Idaho & Washington

Donne - I can't agree with you more!  Thanks for stopping by.  I hope you have a great day!!!

March 03, 2009 05:10 pm
Rainer
38,759
Michelle Chamberlain
Above All Financial Services -Pennsylvania Mortgage Broker

Nice post.  Godd info for consumers and probably a few loan officers who didn't understand the products they were selling either.

March 04, 2009 12:16 am
Rainer
38,644
KMG Mortgage Group - ID & WA
KMG Mortgage Group - Kevin & Maryellen, Idaho & Washington

Michelle - You are so right!  I shudder to tell you how many Loan Officers I know who don't know what the  numbers stand for.  No wonder we're in this mess!

March 04, 2009 11:31 am
Rainer
38,644

KMG Mortgage Group - ID & WA