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ARM Interest Rate / Payment Change Scenarios

What happens when my interest rate changes?

 

Now that we know how an Adjustable Rate Mortgage works, let's look at a few interest rate and payment adjustment scenarios.  Keep in mind, most ARM loans use one of three indices: 

                                                                1.  The Prime Rate   

                                                                2.  The 1-year Treasury Rate  

                                                                3.  The 1-year LIBOR rate. 

The following scenarios include each of one of these indices. 

CONVENTIONAL ARM LOAN PAYMENT SCENARIOS: 

Scenario 1:  Fred and Wilma Flintstone took out a 7/1 conventional ARM loan in February of 2011 for $335,000.   Their initial interest rate is 3.50%, Their loan has a 2% "initial" CAP, and 6% "lifetime" CAP bringing the maximum rate to 9.50%.  Their "margin" is 2.75% and their "index" is the 1-year U.S. Treasury Rate (constant maturity).  

February of 2018 will be their first interest rate adjustment (with a 2% cap).  As of that date ,the current 1-year Treasury Rate is 2.00% (up from .82% one year ago).  This is their "index".   Their "margin" is 2.75%.   We combine the two to arrive at a new interest rate of 4.75%, so their interest rate has increased 1.25%.  This will be the interest rate for the next 12 months.  The current balance is $311,000.  

Because of the interest rate increase, their monthly payment will increase $323.93.

If the 1-year Treasury Rate would increase the same over the next year, their interest rate would be approximately 6.0% (when rounded up to the next 1/8th rate).  Their payment would adjust up again.  The maximum interest rate is 9.50%

 

Scenario 2George and Jane Jetson took out a 5/1 conventional ARM loan in February of 2013 for $265,000.   Their initial interest rate is 3.25%.  Their loan has a 2% "initial" CAP, and 6% "lifetime" CAP bringing the maximum rate to 9.25%.  Their "margin" is 2.25% and their "index" is the 1-year LIBOR Rate.  

February of 2018 will be their first interest rate adjustment (with a 2% cap).  As of that date, the current 1-year LIBOR Rate is 2.39% (up from 1.74% one year ago).  This is their "index".   Their "margin" is 2.25%.   We combine the two to arrive at a new interest rate of 4.75% (4.64% rounded up to the next 1/8th), so their interest rate moved up 1.50%.  This will be the interest rate for the next 12 months.  The current balance is $241,000.  

Because of the interest rate increase, their monthly payment will increase $301.25.

If the 1-year LIBOR would increase the same over the next year, their interest rate would be approximately 6.0% (when rounded up to the next 1/8th rate).  Their payment would adjust up again.  Again the maximum interest rate is 9.50%

JUMBO ARM LOAN PAYMENT SCENARIOS:

Scenario 1:  Mike and Carol Brady took out a 7/1 Jumbo ARM loan in February  of 2011 for $950,000.   Their initial interest rate is 3.25%,  Their loan has a 2% "initial" CAP, and 6% "lifetime" CAP bringing the maximum rate to 9.25%.  Their "margin" is 2.25% and their "index" is the 1-year LIBOR Rate.  

February of 2018 will be their first interest rate adjustment (with a 2% cap).  As of that date, the current 1-year LIBOR Rate is 2.39% (up from 1.74% one year ago).  This is their "index".   Their "margin" is 2.25%.   We combine the two to arrive at a new interest rate of 4.75% (4.64% rounded up to the next 1/8th), a 1.50% increase.  This will be the interest rate for the next 12 months.  The current balance is $894,000.  

Because of the interest rate increase, their monthly payment will increase $1,117.49

If the 1-year LIBOR would increase the same over the next year, their interest rate would be approximately 6.0% (when rounded up to the next 1/8th rate).  Their payment would adjust up again.  Again the maximum interest rate is 9.50%

Scenario 2:  Barney and Betty Rubble took out a 5/1 Jumbo ARM loan in February of 2013 for $590,000.   Their initial interest rate is 3.25%.  Their loan has a 2% "initial" CAP, and 5% "lifetime" CAP bringing the maximum rate to 8.25%.  Their "margin" is 0.00% and their "index" is the WSJ (Wall Street Journal) current Prime Interest Rate.  

February of 2018 will be their first interest rate adjustment (with a 2% cap).  As of that date, the current WSJ Prime is 4.50% (up from 3.75% one year ago), so this is their "index".   Because their margin is 0.00%, the new interest rate is 4.50%, an increase of .75%.  This will be the interest rate for the next 12 months.  Their current balance is $543,000.

Because of the interest rate increase, their monthly payment will increase $339.37.

If the Prime Rate would increase the same over the next year, their interest rate would be approximately 5.25%.  Their payment would adjust up again.  Again, the maximum interest rate is 8.25%.