Have an ARM? How to read your Note, so you will know what your rate will be.

Here is a standard adjustable rate note.

To determine how your ARM works and how it will adjust, we just need to look at Section 4. This section gives us all the details we need to know to understand how your ARM works.

Let’s go…scroll down to Section 4, and let’s look into the sub sections.

(A) This is the date that your interest rate will adjust, easy enough.

(B) Your index, this could range from a 1 year Libor to a 1 month MTA. Whatever index you have is a percentage. I recommend using moneycafe to look up your index (on that link I have defaulted to the 1-year Libor.) As you can see, as of today the 1-year Libor is 3.20688%. Keep that percentage in mind as we will come back to it.

(C) This section is your margin. The margin is added to your index to create your new interest rate. So for example if your margin is 2.25%, you would add that to your index. If you had the 1-year Libor, your new rate would be 5.50%…rounding it to the nearest .125%. FYI, if you are currently considering an ARM, make sure to ask about your margin.

(D) Limits…this is your “caps.” You can have an initial cap, then an annual cap, and a lifetime cap. So on a 5-year ARM, you will usually have caps of 5/2/5.  If your original rate was 5%, your note would state your rate on the first change date would not be greater then 10%, and your lifetime cap would be 10%.  This means you would never have to pay a rate higher then 10%…even if the 1-year Libor went to 20%.

With this knowledge…you can now calculate your interest rate, and your new payment.  Zillow offers some very user friendly calculators.  Just input your loan balance, new interest rate, and remaining length…and there is your payment.

If you have an adjustable rate loan right now and that rate change is coming in the near future, dig up your note.  Figure out what your rate will adjust and start making the appropriate plans.  Procrastination is a horrible idea in this current market.

September 15, 2008