Central Ohio homeowners and homebuyers typically have the option of choosing a fixed rate mortgage or an adjustable rate mortgage when purchasing or refinancing their home.  What should you know when you are considering an adjustable rate mortgage loan option?  What should you be aware of if you currently have an adjustable rate mortgage loan? 

Where will you find key information about the mortgage loan’s future interest rate?  If you are considering an adjustable rate mortgage for your next real estate transaction, your lender should provide you with an adjustable rate mortgage disclosure.  If you currently have an adjustable rate mortgage, you can pull out your settlement papers and look for the note and the adjustable rate rider to the note. 

How are adjustable rate mortgages calculated?  Adjustable rate mortgages will be calculated by using a simple formula.  Index plus margin equals rate.  The index is determined by a benchmark financial rate.  A couple of common indexes are the Libor, Prime Rate and the Treasury bill.  The index is the adjustable part of the equation and often changes day to day.  The margin is the percentage that will be added to the index to determine your interest rate.   

Adjustable rate mortgages will initially have a fixed rate period.  Fixed rate periods can range from 1 month to 10 years.  During the fixed rate period your interest rate will remain the same.  At the end of the initial fixed period of an adjustable rate mortgage the interest rate will adjust. 

Rate adjustment caps define the maximum to which your interest rate may increase or decrease.  Adjustable rate mortgage loans have three important caps.  These caps are often described in a three number sequence.  For example, a conforming 5/1 adjustable rate mortgage loan has 5/2/5 caps.  The first 5 describes the first adjustment cap.  In this case the interest rate may increase or decrease a maximum of 5%.  The 2 describes the maximum increase or decrease of your adjustable rate mortgage for the remaining adjustment periods.  The second 5 describes the life cap.  In this case the mortgage could never increase or decrease by more than 5% of the initial rate. 

Frequency describes how often the adjustable rate mortgage rate will be calculated.  Adjustable rate mortgages have a fixed initial period and then they adjust.  After the first adjustment a new interest rate is determined.  How long that rate will be valid is determined by how frequently the note calls for the rate to be recalculated.  Home equity lines of credit may adjust monthly.  Typically conventional conforming adjustable rate mortgages adjust semi-annually or annually. 

When examining adjustable rate mortgage options, it is important to understand how your interest rate will be determined, how long the interest rate will be fixed and how often the interest rate may adjust.  All adjustable rate mortgages are not the same and you should consider how these factors fit into your lifestyle and future plans when making a decision.