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*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 2: George 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 $1,117.49If 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%.