This type of loan has a fixed interest rate for an initial period of time, and monthly payments based on a 30-year repayment schedule. At the end of the initial period (typically five, seven or 10 years), the interest rate and monthly payment may change each year thereafter. This is called the "adjustment period."
Following each adjustment period, the new rate is based upon changes in a financial index and is calculated by adding a predetermined amount to that index. The amount that is added to the index is called the margin.
Many adjustable rate mortgage loans have adjustment caps. Those caps limit the amount an interest rate can increase during each adjustment period, and the life of the loan.
For example, let’s say the index equals 4.5% at the time of adjustment and the margin equals 2.5%. The new interest rate would be 7%. The new monthly payment would be calculated at the new monthly interest rate, based upon the number of years remaining for the loan term. If your current interest rate is 4% and your annual cap is 2%, then your interest rate can only go up to 6% during that adjustment period. However, the interest rate is likely to go up again during the subsequent adjustment period.
Due to the added risk associated with changing interest rates, Adjustable Rate Mortgage Loans are not appropriate for all borrowers. For that reason, we are not able to offer Adjustable Rate Mortgage Loans through our website. Contact us directly to speak with one of our experienced loan officers and discuss your unique financial goals and situation.