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Now that we know how an Adjustable Rate Mortgage works, let's look at a few interest rate and payment adjustment scenarios.

Scenario 1: Fred and Wilma Flintstone took out a 7/1 conventional ARM loan in February of 2012 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 2019 will be their first interest rate adjustment (with a 2% cap). As of that today ,the current 1-year Treasury Rate is 2.67% (up from 1.41% one year ago). This is their "index". Their "margin" is 2.75%. We combine the two to arrive at a new interest rate of 5.50% (rounded up from 5.42%), so their interest rate has increased 2.00%. This will be the interest rate for the next 12 months, then the next annual adjustment will happen. The current balance is $311,000.

Because of the interest rate increase, their monthly payment will increase $317.03.If the 1-year Treasury Rate would increase the same over the next year, their interest rate would be approximately 6.875% (when rounded up to the next 1/8th rate). Their payment would adjust up again. The maximum interest rate is 9.50%

Scenario 2: George and Jane Jetson took out a 5/1 conventional ARM loan in February of 2014 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 2019 will be their first interest rate adjustment (with a 2% cap). As of today, the current 1-year LIBOR Rate is 3.02% (up from 1.82% one year ago). This is their "index". Their "margin" is 2.25%. We combine the two to arrive at a new interest rate of 5.375% (5.27% rounded up to the next 1/8th), so their interest rate moved up 2.125%. This will be the interest rate for the next 12 months, then the next annual adjustment will happen. The current balance is $241,000.

Because of the interest rate increase, their monthly payment will increase $264.90.If the 1-year LIBOR would increase the same over the next year, their interest rate would be approximately 6.50% (when rounded up to the next 1/8th rate). Their payment would adjust up again. Again the maximum interest rate is 9.50%

Scenario 3: Mike and Carol Brady took out a 7/1 Jumbo ARM loan in February of 2012 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 2012 will be their first interest rate adjustment (with a 2% cap). As of today, the current 1-year LIBOR Rate is 3.02% (up from 1.82% one year ago). This is their "index". Their "margin" is 2.25%. We combine the two to arrive at a new interest rate of 5.375% (5.27% rounded up to the next 1/8th), a 2.125% increase. This will be the interest rate for the next 12 months, then the next annual adjustment will happen. The current balance is $894,000.

Because of the interest rate increase, their monthly payment will increase $881.95.If the 1-year LIBOR would increase the same over the next year, their interest rate would be approximately 6.50% (when rounded up to the next 1/8th rate). Their payment would adjust up again. Again the maximum interest rate is 9.50%

Scenario 4:Barney and Betty Rubble took out a 5/1 Jumbo ARM loan in February of 2014 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 2019 will be their first interest rate adjustment (with a 2% cap). As of today, the current WSJ Prime is 5.25% (up from 4.25% one year ago), so this is their "index". Because their margin is 0.00%, the new interest rate is 5.25%, an increase of 2.0%. This will be the interest rate for the next 12 months, then the next annual adjustment will happen. Their current balance is $543,000.

Because of the interest rate increase, their monthly payment will increase $589.78.If the Prime Rate would increase the same 1.0 over the next year, their interest rate would be approximately 6.25%. Their payment would adjust up again. Again, the maximum interest rate is 8.25%.