ARM BASICS

02/12/2014

Amortization
All Agency, Non-Agency Jumbo, FHA and VA ARMs are amortized over a 30 year
period and are subject to an interest rate adjustment on specific dates, also known
as change dates.
5 year ARMs are fixed for the first 5 years. Then they begin to adjust annually for the
remaining 25 years.
7 year ARMs are fixed for the first 7 years. Then they begin to adjust annually for the
remaining 23 years.
10 year ARMs are fixed for the first 10 years. Then they begin to adjust annually for the
remaining 20 years.

Index and Margin

Index
Our FHA and VA ARMs use the 1 year Constant Maturity Treasury (CMT) rate. The
CMT index is based on the rates of existing, marketable securities issued by the US
government.
Our Agency and Non-Agency Jumbo ARMs use the 1-year LIBOR index. The LIBOR
is posted daily and represents the interest a group of banks in London will pay for a
deposit of US currency.

Caps
The caps on an ARM determine how much a rate can adjust up or down at each
change date and over the life of the loan.
Initial cap - the max amount a rate can adjust up or down on the first change date.
Periodic cap - the max amount a rate can adjust up or down on each subsequent
change date.
Lifetime cap - the max amount a rate can adjust up over the life of a loan.

Note: There is no limit to the amount a rate can adjust down over the life of a loan.
However, since it is calculated by adding the index to the margin, which remains
constant, the rate will never fall below the margin.

6135 Park South Drive, Suite 200 Charlotte, NC 28210 | www.qlmortgageservices.com | SOS Hotline 800.443.2556

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ARM BASICS
These are the current caps:
Product

Initial Cap

Periodic Cap

Lifetime Cap

Agency 5 year

2%

2%

5%

Agency 7 year

5%

2%

5%

Agency 10 year

5%

2%

5%

FHA and VA 5 year

1%

1%

5%

Non-Agency Jumbo

5%

2%

5%

Qualifying Rate
Agency 5 Year

Greater of the Note rate + 2% OR the fully indexed rate

Agency 7 Year

Greater of the Note rate OR the fully indexed rate

Agency 10 Year

Greater of the Note rate OR the fully indexed rate

FHA and VA 5 Year

Qualify at Note Rate +1%

Non-Agency 5-year Jumbo Greater of the Note rate + 2% OR the fully indexed rate

How can the APR be lower than the Note Rate on an ARM loan?
The APR is calculated by factoring in the up-front closing costs to the interest rate payments.
On an ARM, if the fully indexed rate, (fully indexed meaning margin +index) is lower than
the start rate, your APR will be lower.

5-Year Fixed ARM at 4%

Years 1-5: 4%
Years 6-30:

Adjusted rate at origination (3%) +

closing costs = lower APR than interest rate.

ARM payments when the rate adjusts

When an ARM adjusts, the payment is based on the remaining balance. ARMs are
re-amortized over the remaining term of the loan at each change date.

6135 Park South Drive, Suite 200 Charlotte, NC 28210 | www.qlmortgageservices.com | SOS Hotline 800.443.2556

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