ARM Calculations

Question 1

Fully Indexed Rate or Interest Rate

Answer 1

Index + Margin

Question 2

What is the Fully Indexed Rate used for?

Answer 2

This is used to calculate the current monthly payment for the adjustment period

Question 3

What can change over time, the index or the margin?

Answer 3

The index changes over time while the margin always stays the same

Question 4

What are adjustment caps? (e.g. 2/3/8)

Answer 4

The adjustment caps limit the amount the interest rate can adjust after the fixed rate period ends

Question 5

What does the 5 represent in a 5/1 ARM?

Answer 5

The first number specifies how long the rate stays fixed at the beginning of the term.

Question 6

What does the 1 represent in a 5/1 ARM?

Answer 6

The next number tells you how often the rate adjusts once the fixed-rate portion of the loan is over. A 6 would mean every 6 months.

Question 7

What does the 3 in 3/2/8 represent in this adjustment cap?

Answer 7

First Adjustment Cap - The first cap is a limit on the amount the rate can adjust upward the first time the payment adjusts.

Question 8

What does the 2 in 3/2/8 represent in this adjustment cap?

Answer 8

Second Adjustment Cap - The second cap is a limit on the amount the rate can adjust upward with each adjustment after the first one.

Question 9

What does the 8 in 3/2/8 represent in this adjustment cap?

Answer 9

Lifetime Adjustment Cap - The final number is the lifetime limit on increases.

Question 10

What is the initial interest rate?

Answer 10

The initial interest rate is the first fixed interest rate received at the consummation of the loan before any rate adjustments.

Question 11

What is the equation to figure out if the cap rate should kick in?

Answer 11

The calculated 1st/2nd/3rd Adjustment Rate - The initial/previous interest rate = The total change from the previous rate to the adjusted rate.

Question 12

What is important to remember regarding adjustment rate caps?

Answer 12

The change from the previous rate to the next adjusted rate must not surpass the specified cap.

Question 13

What happens if the change from the previous interest rate to the next interest rates exceeds the adjustment cap?

Answer 13

We add the cap adjustment rate to the previous adjustment rate to arrive at the next adjustment rate used to calculate the new monthly payment.