) have an initial fixed-rate period of 1, 3, 5, 7 or 10 years after which time they convert to an adjustable rate mortgage. Dependent on the length of time you intend to own your home, the ARM might be a consideration.
ARMs consist of two parts: one part that is fixed (
) and one part that adjusts (
). When you add the two parts together, you get the fully indexed rate. This determines the
after the initial fixed period.
Fully Indexed Rate = Margin + Index
On a typical ARM, the margin can vary from 2.25% to 3.00% depending on the index. The One Year Treasury Security is the most common index and has been averaging between .10% to .50% over the past 5 years. Other indexes include LIBOR (
London Interbank Offered Rate
) and Prime. After the rate adjusts, it is then fixed until the next
which is typically bi-annually or annually.
Adjustable rate mortgages have a built-in protective
which limits how much the rate can increase. Most ARMs have an initial cap of 2% and a lifetime cap of 6% which means, the interest rate cannot adjust up or down more than 2% per adjustment period and no more than 6% above the
initial interest rate