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| Real Life Information... on Home Related Topics - Mortgage Information |
The margin
To determine the interest rate on an ARM, lenders add a few percentage points to the
index rate, called the margin. The amount of the margin may differ from one lender to
another, but it is usually constant over the life of the loan. The fully indexed rate is
equal to the margin plus the index. If the initial rate on the loan is less than the fully
indexed rate, it is called a discounted index rate. For example, if the lender uses an
index that currently is 4% and adds a 3% margin, the fully indexed rate would be
Index 4% + Margin 3%
Fully indexed rate 7%
If the index on this loan rose to 5%, the fully indexed rate would be 8% (5% + 3%). If
the index fell to 2%, the fully indexed rate would be 5% (2% + 3%).
Some lenders base the amount of the margin on your credit record--the better your
credit, the lower the margin they add--and the lower the interest you will have to pay
on your mortgage. In comparing ARMs, look at both the index and margin for each
program.
Next: Adjustable Rate Mortgages Cont’d
Back to: Mortgage Overview
To determine the interest rate on an ARM, lenders add a few percentage points to the
index rate, called the margin. The amount of the margin may differ from one lender to
another, but it is usually constant over the life of the loan. The fully indexed rate is
equal to the margin plus the index. If the initial rate on the loan is less than the fully
indexed rate, it is called a discounted index rate. For example, if the lender uses an
index that currently is 4% and adds a 3% margin, the fully indexed rate would be
Index 4% + Margin 3%
Fully indexed rate 7%
If the index on this loan rose to 5%, the fully indexed rate would be 8% (5% + 3%). If
the index fell to 2%, the fully indexed rate would be 5% (2% + 3%).
Some lenders base the amount of the margin on your credit record--the better your
credit, the lower the margin they add--and the lower the interest you will have to pay
on your mortgage. In comparing ARMs, look at both the index and margin for each
program.
Next: Adjustable Rate Mortgages Cont’d
Back to: Mortgage Overview
Adjustable Rate Mortgages (ARMS)
Loan Descriptions
Lenders must give you written information on each type of ARM loan you are
interested in. The information must include the terms and conditions for each loan,
including information about the index and margin, how your rate will be calculated,
how often your rate can change, limits on changes (or caps), an example of how high
your monthly payment might go, and other ARM features such as negative
amortization.
Lenders must give you written information on each type of ARM loan you are
interested in. The information must include the terms and conditions for each loan,
including information about the index and margin, how your rate will be calculated,
how often your rate can change, limits on changes (or caps), an example of how high
your monthly payment might go, and other ARM features such as negative
amortization.
The index
The interest rate on an ARM is made up of two parts: the index and the margin. The
index is a measure of interest rates generally, and the margin is an extra amount that
the lender adds. Your payments will be affected by any caps, or limits, on how high or
low your rate can go. If the index rate moves up, so does your interest rate in most
circumstances, and you will probably have to make higher monthly payments. On the
other hand, if the index rate goes down, your monthly payment could go down. Not all
ARMs adjust downward, however--be sure to read the information for the loan you are
considering.
The interest rate on an ARM is made up of two parts: the index and the margin. The
index is a measure of interest rates generally, and the margin is an extra amount that
the lender adds. Your payments will be affected by any caps, or limits, on how high or
low your rate can go. If the index rate moves up, so does your interest rate in most
circumstances, and you will probably have to make higher monthly payments. On the
other hand, if the index rate goes down, your monthly payment could go down. Not all
ARMs adjust downward, however--be sure to read the information for the loan you are
considering.
The adjustment period
With most ARMs, the interest rate and monthly
payment change every month, quarter, year, 3 years,
or 5 years. The period between rate changes is
called the adjustment period. For example, a loan
with an adjustment period of 1 year is called a 1-year
With most ARMs, the interest rate and monthly
payment change every month, quarter, year, 3 years,
or 5 years. The period between rate changes is
called the adjustment period. For example, a loan
with an adjustment period of 1 year is called a 1-year
Lenders base ARM rates on a variety of indexes. Among the most common indexes
are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of
Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders
use their own cost of funds as an index, rather than using other indexes. You should
ask what index will be used, how it has fluctuated in the past, and where it is
published--you can find a lot of this information in major newspapers and on the
Internet.
are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of
Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders
use their own cost of funds as an index, rather than using other indexes. You should
ask what index will be used, how it has fluctuated in the past, and where it is
published--you can find a lot of this information in major newspapers and on the
Internet.
ARM, and the interest rate and payment can change once every year; a loan with a
3-year adjustment period is called a 3-year ARM.
3-year adjustment period is called a 3-year ARM.
To help you get an idea of how to compare different indexes, the following chart shows
a few common indexes over an 11-year period (1996-2006). As you can see, some
index rates tend to be higher than others, and some change more often. But if a
lender bases interest-rate adjustments on the average value of an index over time,
your interest rate would not change as dramatically.
a few common indexes over an 11-year period (1996-2006). As you can see, some
index rates tend to be higher than others, and some change more often. But if a
lender bases interest-rate adjustments on the average value of an index over time,
your interest rate would not change as dramatically.
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