Some quick pointers you should know about a typical adjustable rate mortgage (arm mortgage) loan before you decide on the product. 1. Usually the initial rate is low but often the lending institution requires that the borrower use the second year ( or the adjustment years) maximum rate to qualify for the loan. Example : If the arm loan is a 3-1 with a start rate of 3.5% and the maximum yearly adjustment is 1 % then the borrower has to qualify for the loan amount based on a rate of 4.5% and not the start rate of 3.5%. 2. There is a cap related to most arm mortgages ( adjustable rate mortgage) and the price of the loan usually depends on this matter. A cap example is 2/5 this means that the loan has a the ability to adjust up to 2 percent over the previous rate during the adjustment period. In theory the rate may also go down at that period by a maximum of 2 percent. Although this adjustment down is allowable read through the arm mortgage agreement when doing your loan application to ensure that the mortgage is able to adjust down. The second number in the cap is the maintain lifetime adjustment of the loan. So in the previous example a loan may adjust only 2 percent per determined adjustment period and it may never go over 5% from the original start rate. To make sense of this is the 3.5% example with a 2/5 cap. The second adjustment year if the loan goes to 5.5% and the following year to 7.5% the next year it cannot go to 9.5%, even though the yearly adjustment allows for 2 % the life cap limits the rate to a max of 8.5%. 3. The Margin is crucial in the adjustable rate mortgage type you chose. This information usually not clearly disclosed and often even when it is it is to confusing. Here is a basic explanation of a margin for a non home loan professional. When you get an adjustable rate mortgage the margin is what is used to determine how the adjustment will occur. The cap is used as maximum and minimum tools of rate but the actual adjustment calculation is made by adding the margin to the one year federal funds rate. This federal funds rate is what the banks and mortgage lenders used to add to the margin on the day that the adjustable rate mortgage adjusts. Example: 4% start rate 7 year adjustable rate mortgage has a 2/5 Cap and a 2.25% margin. For the first 7 years of the loan the interest rate is 4% and no worries. Come the end of the seventh year of the loan the adjustment begins. The lending institution will look at that days fed funds rate. If the Feds fund rate is 3.25 % they will add the margin 2.25% which will equal 5.5%. Now they must make sure that the rate does not exceed the yearly cap of 2%, well 4% (arm start rate) plus 2% (max yearly adjustment) equals 6%. Well the margin plus the fed funds equal 5.5% so the adjustment is fine and the new rate at adjustment is 5.5%. 4. What if the Margin plus the fed funds exceeds the max yearly rate. Fairly clear answer. You cannot exceed the max cap yearly so you will go to the highest yearly adjustment. 5. Some other factors in the adjustable rate mortgage is the way the loan adjusts after the initial change. This can be stated when the caps are described. So a cap that is 2/5 may also have a added number that is 6 or 3 this number may tell you how often the rate can adjust after the fixed portion of the loan has paced. So for a 5 1 adjustable rate mortgage with a 3 added to the cap info means that when the arm portion of the loan begins it can adjust once very three months.. Most standard VA and FHA adjustable rate mortgages only adjust once a year and standard conventional arm loans tend to only adjust once a year. But unique loans like LIBOR's or COFI arms tend to have a very often adjustment and therefore may have payment options that are made up of interest only, principle only or a full payment of principle and interest. Amerinet Mortgage Helping you find the perfect fit