UNDERSTAND ADUSTABLE RATE MORTGAGE PRODUCTS

ARM ADJUSTMENT CALCULATION It's easy to read about how an ARM adjusts, but it's easier to understand when you see a calculation. For the following calculation, we will assume the worst case scenario, which is the interest rate going up the maximum each adjustment. (This is not typical at all, but it will show you how the calculation works.)

Initial Interest Rate = 6.00% This ARM has an adjustment cap of 2.00% and a life cap of 6.00% above the initial interest rate. Therefore your new interest rate cannot go above 2.00 from where it is on any adjustment and cannot surpass 6.00 above the initial interest rate or 12% in the case of this example. The margin is 2.50.

First Adjustment:

Step One Current Index = 5.34 Add Margin = 2.50 Preliminary New Rate = 7.84

Step Two Current Index = 5.34 Add Adjustment Cap = 2.00 Preliminary New Rate = 7.34

Your new interest rate is the lower of the two or 7.34%. (not above the life cap 12%)

Second Adjustment:

Step One Current Index = 6.64 Add Margin = 2.50 Preliminary New Rate = 9.14

Step Two Current Index = 6.64 Add Adjustment Cap = 2.00 Preliminary New Rate = 8.64

Your new interest rate is the lower of the two or 8.64%. (not above the life cap of 12%)

Third Adjustment:

Step One Current Index = 8.54 Add Margin = 2.50 Preliminary New Rate = 11.04

Step Two Current Index = 8.54 Add Adjustment Cap = 2.00 Preliminary New Rate = 10.54

Your new interest rate is the lower of the two or 10.54%. (not above the life cap of 12%)

Fourth Adjustment:

Step One Current Index = 10.74 Add Margin = 2.50 Preliminary New Rate = 13.24

Step Two Current Index = 10.74 Add Adjustment Cap = 2.00 Preliminary New Rate = 12.74

Your new interest rate is the lower of the two or 12.00%. (cannot exceed the life cap of 12%)

DIFFERENT INDEXED ARMs

Treasury Indexed ARMs These ARMs are tied to the weekly average yield of the U.S. Treasury Securities. There are six of these. Some of these ARMs adjust once every six months, once each year or once every three years. Make sure that you find out exactly which Treasury Index your ARM is tied to. This is the most common index used for ARM products.

Cost of Funds Indexed ARMs (COFi) The COFi is also known as the 11th Federal Home Loan Bank District or the 11th District Cost of Funds. This index is one of the indexes that does not move as often as some others. COFi ARMs normally adjust each month, every six months or once each

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