Adjustable Rate Mortgages, ARM
It is a more and more common problem- you open your mortgage bill only to find that your payment has doubled. How did this happen? As explained here, adjustable rate mortgages or ARM’s are composed of two parts, an index and a margin. In the first few years of your ARM, you are locked on an introductory or “teaser rate”. Invisible to you, the actual rate may have gone up. It used to be that most ARM’s had some heavy safeguards to protect you, the borrower, but most subprime loans were written with unfavorable terms.
My ARM is going to adjust, how do I calculate the new payment?
What will my ARM adjust to, you are wondering? It is pretty easy to find out. Go dig out your loan packet, it will contain copies of the piles of paperwork you signed when you got this loan- should have a Title company’s name on it. Leaf through to find a document called “Note”. In this document it should give the following information: what Index the ARM is based on, the margin and the caps. If it’s not there, there should be a document entitled “adjustable rate rider” which should have it. Let’s say for example that your loan was a 5/1 ARM, the index was the 1 year LIBOR, the margin was 4.00 and the caps were 3/2/6.
5/1 means you have 5 years or 60 months at the rate you signed on, (this is called the introductory rate) and that the loan adjusts once per year thereafter. The caps mean the first time your rate adjusts, it can go to a maximum of 3% higher from where you started. After that, it may go up a maximum of 2% per year, and may not exceed 6% from where you started. So to answer in this case what your ARM will adjust to is that the interest rate cannot go up more than your terms.
Say your 5/1 ARM was fixed for 5 years at 6.000%. Using a value for 1 year LIBOR of 3.25%, your first adjustment would be index plus margin (4.00+3.25) or 7.25%. Since index rates are low at the moment, less people are having trouble with them, especially those with HELOC’s benefitting from low prime rates. The exception to this rule would be non-prime and subprime loans which were written with hefty margins often causing large payment increases.
Remember, the interest rate that your ARM will adjust to is index plus margin. Common adjustable rate indexes are the LIBOR, MTA, COSI etc. However, your first adjustment will not exceed the cap specified in your loan document terms. Common solutions to the problem of the adjusting ARM are a refinance, government assistance program, or a loan modification(for those who do not have equity).
We have loan officers on staff who will help you calculate what your ARM will adjust to and explore your options to avoid an ARM adjustment. Contact us below for a No cost or obligation consultation.