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One of the Nation's Leading Publishers of Home Finance
Information.
HOW ARMS WORK:THE BASIC FEATURES
The Adjustment Period
With most ARMs, the interest rate and monthly payment change every
year, every three years, or every five years. However, some ARMs have
more frequent interest and payment changes. The period between one rate
change and the next is called the adjustment period. So, a loan with an
adjustment period of one year is called a one-year ARM, and the interest
rate can change once every year.
The Index
Most lenders tie ARM interest rate changes to changes in an "index
rate." These indexes usually go up and down with the general movement of
interest rates. If the index rate moves up, so does your mortgage rate
in most circumstances, and you will probably have to make higher monthly
payments. On the other hand, if the index rate goes down your monthly
payment may go down.
Lenders base ARM rates on a variety of indexes. Among the most
common are the rates on one-, three-, or five-year Treasury securities.
Another common index is the national or regional average cost of funds
to savings and loan associations. A few lenders use their own cost of
funds, over which--unlike other indexes--they have some control. You
should ask what index will be used and how often it changes. Also ask
how it has behaved in the past and where it is published.
The above text was extractly directly from the Consumer
Handbook On Adjustable Rate Mortgages, as published by the
Federal Reserve Board and Office of Thrift Supervision. Although the above
text is public domain, this electronic booklet is copyrighted © 1996
by Mortgage Market Information Services, Inc. Readers of this electronic
booklet are allowed to print the booklet for non-profit distribution
Pg 1 -- Introduction and credits
Pg 2 -- PEOPLE ARE ASKING
Pg 3 -- PEOPLE ARE ASKING (continued)
Pg 4 -- WHAT IS AN ARM?
Pg 5 -- HOW ARMS WORK:THE BASIC FEATURES
Pg 6 -- FEATURES (continued)
Pg 7 -- CONSUMER CAUTIONS (Discounts)
Pg 8 -- CONSUMER CAUTIONS (Payment shock)
Pg 9 -- HOW CAN I REDUCE MY RISK?
Pg 10 -- REDUCE MY RISK (continued)
Pg 11 -- REDUCE MY RISK (continued)
Pg 12 -- REDUCE MY RISK (continued)
Pg 13 -- REDUCE MY RISK (continued)
Pg 14 -- WHERE TO GET INFORMATION
Pg 15 -- INFORMATION (continued)
Pg 16 -- GLOSSARY
Pg 17 -- GLOSSARY (continued)
Pg 18 -- MORTGAGE CHECKLIST
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