Information Needed for Evaluating ARMs
July 9, 2003, Reviewed August 27, 2011, April 21, 2012

Both Upfront Mortgage Lenders (UMLs) and Certified Network Lenders (CNLs) are committed to providing the information about their ARMs that is described below. A difference is that mortgage shoppers dealing with UMLs must analyze the data themselves, which is no trivial task, while shoppers on the Certified Lender Network have it analyzed for them as part of the decision support the Network provides.
1. The index to which your ARM rate is tied.

On a rate adjustment date, the rate is set at the index plus margin (5), subject to any caps (6,7,8).

2. The initial interest rate

This is the interest rate that is always quoted on an ARM.

3. The period for which the initial interest rate holds

This period ranges from a month to 10 years.
4. The rate adjustment period after the initial fixed-rate period is over

On ARMs with initial rate periods of 1 year or longer, this is almost always 1 year. On ARMs with initial rate periods shorter than 1 year, the subsequent rate adjustment period is almost always the same as the initial rate adjustment period.
5. The margin that is added to the index value on a rate adjustment date to determine the new rate

This generally ranges from 2 to 3%.

6. The rate adjustment cap limiting the size of the first rate adjustment

This generally ranges from 1 to 5%.

7. The rate adjustment cap limiting the size of subsequent rate adjustments

This generally ranges from 1 to 2%.

8. The maximum interest rate over the life of the loan

This is usually 5 or 6 percentage points above the initial rate.

9. Points
Upfront charge expressed as a percent of the loan.

If the ARM allows negative amortization, you should have the following additional information:

10. The initial payment is calculated (select one):
a. At the initial interest rate.
b. At the initial interest rate but interest only.
c. At another interest rate (specify)

On ARMs that allow negative amortization, the initial payment is not necessarily calculated using the initial interest rate.
11. The initial payment period

On ARMs that allow negative amortization, the period for which the initial payment holds is not necessarily the same as the period for which the initial rate holds. On monthly ARMs, the rate adjusts every month but the payment adjusts every year.
12. The payment adjustment period after the initial period ends

It is usually but need not be the same as the initial payment period.

13. The payment adjustment cap, if any

Usually 7.5% per year, if there is one.
14. The negative amortization cap, if any

On ARMs that allow negative amortization, there is always a limit on how large the negative amortization can get, or how long it can last. Some ARMs set a cap on the loan balance as a percent of the original balance, usually 110% or 115%.

15. The payment recast period, if any


Another way of limiting negative amortization is to require a periodic recast of the payment. A recast recalculates the payment to make it fully-amortizing, using the current loan balance, interest rate and period remaining to term.


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