Get the right rate cap for your ARM
You've got to make sure the payments on your adjustable-rate mortgage won't go up too much, too fast, when the interest rate starts resetting.
This is important, even if you plan to move or refinance before the rate changes. The unexpected can happen, and you need a loan you can live with, no matter what.
Let's say you search our extensive database of mortgage rates for 5/1 ARMs.
The 5/1 ARM is so named because the introductory rate holds steady for the first five years, then resets once every year for the remaining 25 years of the 30-year mortgage.
Look for a column on the right side of the comparison chart called "Cap."
You want a loan that says: "2-2-6" not "5-2-5."
The first number tells you the maximum number of percentage points your mortgage rate could rise on the first reset.
The second number tells you the maximum number of percentage points your rate can rise each year after that.
The third number is the maximum number of percentage points your rate can rise over the life of the loan.
With a "5-2-5" cap, your first increase could be as big as 5 percentage points and push you to the maximum possible rate in just one reset.
A "2-2-6" loan could ultimately result in a higher interest rate, but it could increase by no more than 2 percentage points a year.
It's the big jumps that hurt homeowners the most. The smaller the adjustments, the easier it is to adjust your budget and cope with the higher payments.
It's also important that you get an ARM that resets no more than once a year.
Borrowers have been much more prone to default on loans that reset every month or even every six months.
The amount you'll pay when your loan resets will be determined by a financial index that reflects current lending rates.
It usually will be your introductory rate (or another set rate called the margin) plus the index. As you might suspect, some indexes are better than others.
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