I have a question about ARM loans?

Question

I have a 5 year ARM loan on my home that is set to adjust in 2010. I can't seem to get a straight answer from my lender as to what they think the rate will be in 2010. As of this moment, my husband and I can't refinance as the estimated value of our home is a little less than what we owe. I had one company send me some stuff in the mail and one lady told me that ARM loans will adjust to 10%!!!! I always thought that the interest rate for an ARM loan was the same as the prime rate at the time. I also thought there was a cap as to how many times they could adjust in a year. Does anyone know for sure????? Going from 5% (which is what we have now) to 10% just seems a little drastic to me!!!

Answer 1

When you got your home loan, the lender was required to give you a document that showed a scale of how much your rate could go up. Once your ARM starts adjusting, it can go up X percent each year, for X number of years, with an all-time cap of X percent. The document that you should have received will tell you all this. The all-time max that your rate can end up being after a few years may look pretty high, but that doesn't mean it will go that high.

If it isn't going to adjust until 2010, wait a couple more years and see about refinancing again. Your equity and such will probably be in a better position to do so at that time.

Answer 2

The index is a guide that lenders use to measure interest rate changes. Common indexes used by lenders include the activity of one, three, and five-year Treasury securities, but there are many others. Each ARM is linked to a specific index. Then there is the Margin.

Think of the margin as the lender's markup. It is an interest rate that represents the lender's cost of doing business plus the profit they will make on the loan. The margin is added to the index rate to determine your total interest rate. It usually stays the same during the life of your home loan.


You may see an ARM described with figures such as 1-1, 3-1, and 5-1. This is the Adjustment Period.

This is the period between potential interest rate adjustments. The first figure in each set refers to the initial period of the loan, during which your interest rate will stay the same as it was on the day you signed your loan papers.The second number is the adjustment period, showing how often adjustments can be made to the rate after the initial period has ended. The examples above are all ARMs with annual adjustments--meaning adjustments could happen every year. You need to read and understand the terms of your loan explained in the paperwork you received when you purchased the mortgage.

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Answer 3

They probably can't give you a straight answer because they don't know. Most ARMs are tied to an independent rate, like LIBOR, which is a standard rate used in a lot of financial transactions. The rate might be listed as LIBOR + 1%, for example. The bank doesn't know what LIBOR (or the underlying rate they're actually using) will be in 2010, so they can't tell you what your rate will be exactly.

Some options that sometimes get into ARMs are:

Limits in the frequency at which the rate can adjust (e.g. once a year).

Limits in how much the rate can adjust by at each adjustment (e.g. a 1% cap on how much it can adjust means that it will only go up by 1% at each adjustment, even if the underyling rate would have it increase by more.)

Limit in the total amount the rate can increase by over the lifetime of the loan (e.g. if your loan was capped at 8%, you would never pay more than that no mater how much the underlying rate increased).

It's probably worth looking at your mortage contract to see if any of those are in place. If they are, some of your fears will be ameliorated. If not, at least you'll know what you're dealing with.

Answer 4

Hi there... here is how an ARM loan works. If you have an adjustable rate mortgage and it is at 6% now for 5 yrs, the rate is fixed for this entire period. Now, after this period there is no way for the lender to tell you how it adjusts, because there are two factors which determine that. The loan you have is probably associated with what is called a LIBOR index. Even though you may have not known it at the time you did the loan. It is currently hovering around little over 5%.... and is variable every month. There is also a margin on the loan this is fixed for life. This is where things get tricky. The margin is added to index to give you your fully indexed rate, but this changes every mo... hence, variable.
However - here is the good news. In 3 yrs from you, you should have hopefully enough equity to do a new fixed loan at prevailing rates... almost certain to be less than 10%...

Answer 5

look at the closing docs from your mortgage there is a adjustable rate rider at the end and it says what the adjustment will be in five years and when it is to begin and what rate is to apply all of your questions are answered in this paper. If you don't have it you can also look for it in public records on the internet. look for county records property search and then with your name or address you will find the copy of your mortgage. go to the ARM RIDER at the end of the paperwork and read the answers to your questions next to your signature on the same paperwork
if you need more help e mail ma at [e-mail]

Answer 6

there is a cap, however your cap changes annually with the market..you wont know an exact interest until that time. call your lender and they will tell you the cap (that is the MOST it will adjust) what state do you live in?!

Answer 7

you have 2 whole years to find another mortgage if you need to. Relax.