Anatomy of the ARM

To determine the rate on your adjustable mortgage, you first need to understand how an ARM works.

The following terms are integral to an ARM:

Fully Indexed Rate - the rate you must pay, barring any periodic caps, in order to fully amortize or pay off the loan.

Margin - the fixed component of your ARM loan, constant throughout the life of the loan.

Index - the variable component of your ARM loan, changes on a monthly basis. Examples of indices include the Cost of Funds (11th District), One Year Treasury, Monthly Treasury Average (MTA), 1 Year Treasury Average, CD, LIBOR, etc.

INDEX + MARGIN = FULLY INDEXED RATE

Intermediate ARM's

• 10/1 ARM - the rate is fixed for a period of 10 years after which in the 11th year the loan becomes an adjustable rate. The adjustable is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 11th year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information).
• 7/1 ARM - the rate is fixed for a period of 7 years after which in the 8th year the loan becomes an adjustable rate. The adjustable is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 8th year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information).
• 5/1 ARM - the rate is fixed for a period of 5 years after which in the 6th year the loan becomes an adjustable rate. The adjustable is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 6th year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information).
• 3/1 ARM - the rate is fixed for a period of 3 years after which in the 4th year the loan becomes an adjustable rate. The adjustable is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 4h year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information).

Traditional ARM's

• 1 Year Treasury ARM (1 YR T-Bill) - the rate is fixed for 1 year (this initial rate is sometimes referred to as the teaser or start rate) after which in the 2nd year the rate will adjust based on the 1-year treasury index which is added to a pre-determined margin to arrive at the new annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information).
• 1 Year Treasury Average ARM - the rate is fixed for 1 year (this initial rate is sometimes referred to as the teaser or start rate) after which in the 2nd year the rate will adjust based on the 1-year treasury average index which is added to a pre-determined margin to arrive at the new annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information).
• Monthly Treasury Average ARM (MTA) - the rate is fixed for a 3 month period (this initial rate is sometimes referred to as the teaser or start rate) after which your rate is based on the monthly treasury average index which is added to a pre-determined margin to arrive at the new monthly rate. This loan may also have periodic payment caps as well as interest rate caps, and therefore could have the potential for negative amortization. Ask what the margin, life cap and periodic caps of your ARM will be. (Also see anatomy of an ARM for additional information).
• COFI ARM (Cost of Funds) - the rate is fixed for a 3 month period (this initial rate is sometimes referred to as the teaser or start rate) after which your rate is based on the 11th district cost of funds index (COFI) which is added to a pre-determined margin to arrive at the new monthly rate. This loan may also have periodic payment caps and therefore the potential for negative amortization. Ask what the margin, life cap and periodic caps of your ARM will be. (Also see anatomy of an ARM for additional information).
• 6 Month CD ARM - the rate is fixed for 6 months (this initial rate is sometimes referred to as the teaser or start rate) after which in the 7th month the rate will adjust based on the 6-month CD index which is added to a pre-determined margin to arrive at the new semi-annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information).
• LIBOR ARM (London Interbank Offer Rate) - the rate is fixed for 6 months (this initial rate is sometimes referred to as the teaser or start rate) after which in the 7th month the rate will adjust based on the 6-month LIBOR index which is added to a pre-determined margin to arrive at the new semi-annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed. (Also see anatomy of an ARM for additional information).