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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 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 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)
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.
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.
adjustment period is called a 3-year ARM.
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.
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.
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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