ADJUSTABLE RATE MORTGAGES

Variable or adjustable loan is a loan whose interest rate, and the accompanied monthly payments, fluctuates over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application.

New interest rate = index + margin

The margin is a fixed percentage of points added to the index to compute the interest rate. The result will then be rounded to the nearest one-eighth of a percent.

Most ARM loans have an interest rate cap to protect you from enormous increases in monthly payments. A lifetime cap limits the interest rate increase over the life of the loan. A periodic or adjustment cap limits how much your interest rate can rise at one time.

Your mortgage disclosure will tell you the exact index to be used, whether the weekly or monthly value applies, the lead time for your index, the margin, and any caps.