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ARM Payment Adjusting? Get Your New Payment

Mortgage rates for many adjustable rate mortgages will be rising this year and next. 


Here are the six steps to calculating the new payment on your adjustable rate mortgage when it changes:


1- Pull out your NOTE.  The NOTE is the agreement you signed when you agreed to borrow the money.  It may have riders attached to it.  If it is not an ADJUSTABLE RATE NOTE, look for the adjustable rate rider.  If  you have a PREPAYMENT PENALTY rider, check that also for the expiration date, just to be sure in case you want to refinance your loan.

  

2- Examine the rate on the note or rider.  There should be language that outlines the initial adjustment period or "change date".  This is when your payment wil change from the initial interest rate (remember this number).


3- Rates are determined by calculating the index plus the margin.  The index is a variable number and is probably  LIBOR, MAT, or COFI.  The margin is established at the loan signing and is printed right on the note after the index.  Most margins that I've seem are 2.75%-3%. For our example, let's assume that the index is LIBOR and the margin is 3.0%.


4- Add the index (in this case LIBOR is 5.14%.  Add the margin (3.0%).  Your new interest rate will be 8.14%...maybe.


5- Your note may have a provision for interest rate caps.  That means that the new rate cann not exceed the initial rate by a certain amount.  In this example, let's assume the annual cap is 2.0%.  While the rate adjusted to 8.14%, if your initial interest rate was 5.0%, and the loan had a 2% annual rate cap,  the max rate that can be charged is 7.0%. 


6- Armed with that new rate, let's determine your new payment.  If it is an interest-only loan, we multiply the loan amount by the new interest rate  and divide by twelve.  That will be your new payment. 

By Diane Tuman

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