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All About Adjustable Loans To fully understand Adjustable Rate Mortgages (ARMs), it helps to understand the basic ingredients of an ARM. The Terms to understand are: START RATE, DISCOUNT POINTS, MARGIN, INDEX, CAPS, and FREQUENCY. START RATE: This is the interest rate your loan will start out at. DISCOUNT POINTS: Discount points are charged by the lender when you want to lower your interest rate. The more points you pay, the lower your initial interest rate should be. INDEX: This is the rate your loan is tied to. Could be the 1 Year T-Bill, 6 month T-Bill, Cost of Funds Index (COFI), LIBOR (London Interbank Offered Rate), Prime Rate, and many more. Your rate will go up or down as your INDEX goes up or down. MARGIN: The margin is a number you add to the INDEX to arrive at your new interest rate when it is ready to adjust. CAPS: There are usually two caps. Caps limit the amount your loan can go up or down in a given period. Caps are normally written something like this: 1/6. The first number (1) is the most your loan can go up or down in any adjustment period (see Frequency below). The second number is the most your loan can adjust up or down during the life of the loan. FREQUENCY: This is how often your loan will adjust, every year, every 6 months, every 3 months, even every month. AN EXAMPLE: Let us imagine you have purchased a home and have gotten a $100,000 adjustable loan on it. The terms of the loan are: it will adjust every 6 months, the loan's start rate is 6.00%, the rate is tied to the 6 month LIBOR, the margin is 2.750%, and the caps are 1/6. WHAT THE HECK DOES ALL THIS MEAN ! ? ! The Principle & Interest (PI) payment on a $100,000 loan at 6.00% is approximately $599/mo. In 6 months the interest rate, and thus the payment, will change. Your loan is tied to the LIBOR rate. Your MARGIN is 2.750. That means, to find out your new rate, you ad 2.750 to the current LIBOR rate. If the current LIBOR rate was 6.75 at the time your loan is ready to adjust, and you added your MARGIN of 2.750, you would come up with a RATE of 9.50%. However, your CAP for each adjustment is only 1.00%, which means your rate can only go up (or down) 1.00% each adjustment. Add 1.00% to your current 6.00%, and your new rate can be no higher than 7.00%. Your new payment (PI) would be $665/month. Your lifetime cap is 6%, so the highest your interest rate could EVER go would be 12.00%. All adjustable loans are at least 30 years (there are some 40 year adjustable loans available). There are no 15 year adjustable loans available at this time. Remember, Adjustable Loans go up AND down according to how our interest rates are doing. They don't automatically just go up as many people think. All About FHA Adjustable Loans To fully understand Adjustable Rate Mortgages (ARMs), it helps to understand the basic ingredients to an ARM. The Terms to understand are: START RATE, DISCOUNT POINTS, MARGIN, INDEX, CAPS, and FREQUENCY. START RATE: This is the interest rate your loan will start out at. DISCOUNT POINTS: Discount points are charged by the lender when you want to lower your interest rate. The more points you pay, the lower your initial interest rate should be. INDEX: This is the rate your loan is tied to. Could be the 1 Year T-Bill, 6 month T-Bill, Cost of Funds Index (COFI), LIBOR (London Interbank Offered Rate), Prime Rate, and many more. Your rate will go up or down as your INDEX goes up or down. MARGIN: The margin is a number you add to the INDEX to arrive at your new interest rate when it is ready to adjust. CAPS: There are usually two caps. Caps limit the amount your loan can go up or down in a given period. Caps are normally written something like this: 1/6. The first number (1) is the most your loan can go up or down in any adjustment period (see Frequency below). The second number is the most your loan can adjust up or down during the life of the loan. FREQUENCY: This is how often your loan will adjust, every year, every 6 months, every 3 months, even every month. AN EXAMPLE: Let us imagine you have purchased a home and have gotten a $100,000 adjustable FHA loan on it. The terms of the loan are: it will adjust once per year, the loan's Start Rate is 6.50%, the rate is tied to the 1 year T-Bill (that is the Index), the Margin is 3.00, and the Caps are 1/5. WHAT THE HECK DOES ALL THIS MEAN ! ? ! The Principle & Interest (PI) payment on a $100,000 loan at 6.50% is approximately $630/mo. In approximately one year the interest rate, and thus the payment, will change. Your loan is tied to the One Year T-Bill Weekly Average. Your MARGIN is 3.00 points. That means, to find out your new rate, you ad 3.00 to the current One Year T-Bill Weekly Average. Lets imagine that in one year that rate is 6.25% When you add your MARGIN of 3.00 to the current INDEX of 6.25, you would come up with a RATE of 9.25%. However, your CAP for each year is only 1.00%, which means your rate can only go up (or down) 1.00% each year. Add 1.00% to your current 6.50%, and your new rate can be no higher than 7.50%. Your new payment (PI) would be $665/month. Your lifetime cap is 5%, so the highest your interest rate could EVER go would be 11.50%. All FHA adjustable loans are at 30 years loans. There are no 15 year adjustable loans available at this time. Remember, Adjustable Loans go up AND down according to how our interest rates are doing. They don't automatically go up as many people think. The lender qualifies you at the start rate when doing an FHA Adjustable Loan.

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