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I have heard of margins in arm. any information will be helpful.

Samantha · Posted: Sat Oct 08, 2005 8:44 am Post subject: RE:

Hi Joseph

Welcome to the forums.

Margin refers to a few percentage points added to the index rate to determine the rate on an adjustable rate mortgage. The value of margin varies from one lender to another but for a particular loan, it remains constant throughout the loan term.

Interest rate of ARM = Index rate + margin

While comparing ARMs, one should consider both the index and margin for each loan program. Some indexes may have higher average values but lower margins.

Hope this will help you.

Regards,
Samantha.

helping_user

The margin is used to compute the actual interest rate of an Adjustable rate mortgage.

Example 1:
Let, the index of a loan is 5.5% and the margin is 3%.

Then the,

New Interest Rate = 4.2% + 2.6%
New Interest Rate = 6.8%

The result will be rounded to the nearest one-eighth of a percentage.

Actual Interest Rate = 6.75% (The nearest to 0.8% is 0.75%)

The ARMs also have an interest rate caps, lifetime cap and periodic or adjustment cap to limit the interest rate increase over the life of the loan or a particular period.

Example 2:
Let the initial rate is 3.5%, Index is 5.5% and the margin is 2.5%,

Then the,

New Interest Rate = 5.5% + 2.5%
New Interest Rate = 8%

But, if there is lifetime cap is 4% then

Actual Interest Rate = 3.5 % + 4%
Actual Interest Rate = 7.5%

Example 3:
Let the initial rate is 5.2%, Index is 4% and the margin is 2.5%,

Then the,

New Interest Rate = 4% + 2.5%
New Interest Rate = 6.5%

But, if there is periodic cap is 1% then

Actual Interest Rate = 5.2 % + 1%
Actual Interest Rate = 6.2%

To know more about the Rate Cap and the limits, go through the article "Rate Cap - Maximum Rise or Fall in ARM Rate".

Guest

What determines the rate adjustments between terms? (1/1, 3/1 and 5/1).

miller_st · Joined: 17 Jan 2007 Posts: 918 168.95 Dollars($)

Hi Peter,

Rate adjustment for 1/1 loan occurs at the end of 1 year while for 3/1 and 5/1 loans it is at the end of 3 & 5 years respectively. For all these loans adjustment interval will be of one year after the initial fixed interest rate period is over.

Miller

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