How do I calculate my ARM adjustment?
An adjustable rate mortgage, or ARM, typically has a start-rate that is set for a period of 3, 5, 7, or 10 years. After that initial period most ARMs adjust annually. How they adjust will depend upon the terms agreed to in your note, or shown on your adjustable rate disclosure.
Here is the most common type of calculation for adjustable rates:
In order to calculate your new ARM rate, you must add the margin plus the index. The margin is the bank’s profit, and the index we tie our ARM rates to is the 1-year libor. The 1-year libor (London interbank offered rate) is today at 1.07. Our margin is 2.25. If your adjustable rate adjusted today, the new rate would be:
2.25 (Margin) + 1.07 (Index) = 3.375% (rounded to nearest .125%)
One more calculation you need to look at, though, is the initial adjustment cap and the lifetime adjustment cap. For the first adjustment, the initial adjustment cap will govern how much your rate can increase or decrease. For all subsequent adjustments, only the lifetime adjustment cap will apply.
The initial adjustment cap will vary and you should look at your terms of your loan in your note, but most lifetime adjustment caps are 5%. So if your start rate is 4%, and the lifetime cap is 5%, then the ceiling of your rate is 9%.
I’m happy to answer any questions about the calculation of your own adjustable rates. Most of you will find if you have a rate adjusting nowadays, you’ll see your rate go down because the 1-year LIBOR is very low.