Mortgage Minute Adjustable Rate Mortgages – How the Index & Cap Can Affect Your Deal Debbie Siegel, President, WESTCHESTER MORTGAGE An adjustable rate Margin. The margin is a percentage the mortgage (ARM) can be lender adds to the base index rate. It a valuable tool for real accounts for the lender's cost of doing estate investors seeking business and any profit the lender will lower monthly payments make on the loan. and higher cash flow. But buyer beware. It's Adjustment Period. ARMs are often important to know the described in terms of their adjustment index to which your period, which is the period between adjustable rate is tied, the margin, the potential interest rate adjustments. adjustment period, and the cap so that Typically these are 1-year, 3-year or 5- you fully understand your loan. year. Index. The three most commonly used Cap. The cap reflects how high the ARM ARMs indexes include: interest rate can climb during a specific time period, which is typically defined as • LIBOR, the London Interbank Offered six months, a year, or the life of the loan. Rate. A standard financial index used in U.S. capital markets, this is the interest Understanding how your ARM rate will rate at which banks offer to lend money be determined and how high it could among themselves within London's potentially go is critical for real estate wholesale money markets. LIBOR investors. It could spell the difference changes tend to be smaller than prime between a great deal and an unpleasant rate changes. payment surprise. • MTA, a 12-month Moving Treasury Average. An index determined by the monthly average of one-year Treasury bills. Got questions about real estate • 11th District COFI, a monthly cost-of- financing? index. An index that reflects the Contact Debbie@westchester- weighted-average interest rate paid by mortgage.com or 617-965-1236. She’ll 11th Federal Home Loan Bank District consider them for inclusion in a future savings institutions for savings and column. Debbie Siegel is president of checking accounts. It's published at the Westchester Mortgage in Newton, end of each month to reflect the cost of Massachusetts. She is licensed in funds for the prior month. several Northeastern states.
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