- A start rate, also known as the initial interest rate, gives you a
special low monthly payment for a set amount of time (such as 1 year).
- After the start rate period is over, your interest rate is based on
the performance of a financial index, such as the average interest rate
or yield on Treasury bills.
- How often your payments are adjusted based on the index, and how
much rates and payments increase at each adjustment, depends on your
loan terms. A 6-month ARM adjusts every 6 months. A 1-year ARM adjusts
once a year.
- At each adjustment, the new rate is computed by adding the margin -
a predetermined amount that remains the same for the life of your loan -
to your financial index. Example: If the interest rate for the
financial index was 5.5% and your margin 2%, then you rate at the time
of adjustment would be 7.5%.
- Two "caps" may put a limit on the maximum amount your rate can
increase. The periodic cap sets the maximum your rate can go up from one
adjustment period to the next. The life caps sets the maximum interest
rate for the life of the loan.
- Some ARMs offer a conversion feature that allows you to convert to a
fixed rate loan at certain times during your loan.