|
Adjustable rate mortgages are called ARMs for short. The interest rate is changed periodically in accordance with the loan agreement. For example, the loan agreement may state that the rate on a 1-year ARM is reset every September 1st after an initial period of 3 years. The interest rate is calculated by adding a margin to a specific index. The index is an indicator that is tied to the economy and will fluctuate as general interest rates fluctuation. There are many different types of indexes that may change weekly, monthly, annually, etc. The specific loan agreement specifies the index. Some indexes commonly used with ARMs are Treasury bills (T-bills), COFI (Cost of Funds Index), and LIBOR (London InterBank Offered Rate). For example, if the margin for an ARM is set at 3 percentage points and the yield on a 1-year T-bill is 6%, the ARM's rate will be adjusted to 9%. ARM loans usually have provisions (called "caps") that limit how much the loan rate can increase at one resetting and over the term of the loan.
|