Adjustable Rate Mortgage

3/1 ARM

                                                                                                               This type of loan has monthly payments that are based on a                                                                                                                30 year repayment schedule and the interest rate remains                                                                                                                    fixed for the first three years. After that time the interest rate (                                                                                                              monthly payments) may change year after. This is called the                                                                                                                adjustment period. 

                                                                                                               The new rate is based upon changes in a financial index and i                                                                                                              is calculated by adding a specified amount to the index. The                                                                                                                amount that is added to the index is called the margin. Let's

 

say the index equals 4.5% at the time of adjustment and the margin equals 2.50%, the new interest rate would be 7%. However, adjustable loans usually have an adjustment cap. So if the adjustment cap is 2%, the new rate would be 6.5%.​

There is also a lifetime cap which limits how much the rate can go up or down during the life of the loan. These loans can work out well for people who stay in their house for the short term.