Adjustment Frequency

David · Joined: 19 May 2004 Posts: 754 Location: Atlanta, GA

I was wondering if the adjustment frequency (how often the interest rate is adjusted on an ARM) is always yearly, or if there are other frequencies too. It seems that greater lengths of time would be of benefit to the buyer right now, but I would assume the lendors would tend to try to push for more frequent adjustments in the current environment. Am I right?

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

Most often your standard adjustment is 1 year. Some are less, and some are longer. You can have monthly, 6 months, 1 yr, etc. I believe there's a 2 yr (not 100% on that) as well.

Overall it depends on the scenario. I haven't seen any pressure from my company to push shorter adjustment periods on the ARM products, but perhaps it's tightening up outside.

capnmorgan5555 · Joined: 29 Jan 2005 Posts: 29

David,

Most ARM's are still based on an annual adjustment. The Hybrid ARM's are usually fixed for a period of time- 3 years, 5 years, 7 years, & 10 years then they adjust annually with a cap. Those vary also but generally the 5,7 & 10 year have an initial adjustment cap of 5%, an annual cap of 2% and a lifetime cap of 5%, the 3 year usually has a 2% annual cap and a 6% cap- though that can vary once you get away from A paper loans and into subprime and Alt A products.

There have been more and more ARM's that are adjusting every 6 months and most of the option ARMs adjust monthly as do the 1 month ARMs. There used to be a 3/3 ARM, fixed for 3 years, adjusts and is fixed for another 3 years, I haven't seen that one for probably 7 to 10 years.

When rates are going up then the longer adjustment periods are better, but as things were from 2000 to 2003 when rates were coming down it was better to have shorter adjustment periods.

The better question is what the needs of the individual borrower are and what they are trying to accomplish.

I have a one month ARM right now with a low 1.5% margin, fully indexed about 4.625% right now, I know it will be going up another .75% maybe more in the next 12 months, but it gives me cash flow to accomplish some other more important objectives right now. I will probably be in a new house in the next 18 months so I looked at this as a short term deal, but I may go with it again depending on the economic outlook then.

Personally, I think the index and the margin are just as important (actually more important) than the length of adjustment. Too many people get into ARMs with higher than usual margins (usually so the originator can make more money) and if they stay in it to the point where the adjustments are affecting them they really see their rates move up. I see this a lot on Option ARMs, so many originators are out there selling this product with it's low payment based on 1% to 1.95% with potential negative amortization and having ridiculous margins from 2.8% to 3.2%. Since most borrowers aren't educated enough to ask about the margin they get stuck with the highest margin the orginator can get because it pays them the most money.

I did some research on the last 14 years comparing an MTA (Monthly Treasury Average) iwith a 2.5% margin and the COFI (11th District Cost of funds) with a 2.8% margin and the 1 month LIBOR (London Interbank offered rate) with the 1.5% margin I have and the average difference each year was 1.4% lower for the 1 month LIBOR. That means that on average the fully indexed 1 month LIBOR was 1.4% lower than the Option ARMs with the MTA or COFI as the index. So in my opinion the 1 month LIBOR was the better "deal".

I am not bashing the product, just the masses that are now selling it without telling the client all the potential implications of this loan.

Sorry for the long post, I know you aren't a mortgage guy so I was trying to help you understand more about ARMs in case you were considering one.

I hope this helps.

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

I find that most of the time David's questions, while perhaps they are for his own information, are more directed at keeping information flowing in the general public. If someone has a question he wants them to be able to look here and see it.

So Capn, thanks for your post ;)

capnmorgan5555 · Joined: 29 Jan 2005 Posts: 29

No problem. :lol:

chow · Posted: Mon Mar 21, 2005 9:52 pm Post subject:

Capt Morgan, besides being my favorite mixer with a diet coke- I think you helped explain why people should look at different ARM programs, and what they plan to do.

I bought my first house on a ARM. It did nothing but get cheaper to be here, until I decided to stay and add on. It was a good fit for the situation, but thankfully we had options.

I looked at an offer from a lender today for a interest only first mortgage that was higher than the present first mortgage. I called the AE and asked him what the benefit was to write a new first mortgage!
:roll: :roll: :roll: :roll: :roll: :roll:

I know I'm blonde. :P

Shotgunrider · Joined: 22 Mar 2005 Posts: 4 Location: Roanoke, VA

Yes and one that often gets lost in her own home town! :lol:

chow · Posted: Tue Mar 22, 2005 7:41 pm Post subject:

OKAY, who invited this joker in here? :wink: Go find the "Introductions thread" and let these people know how "Hokie" you really are! While you're at it, you can share some of the 9000 :shock: years of wisdom you have too!

Jenie0109 · Joined: 27 Jan 2009 Posts: 307 Location: chicago IL

Thanks for the help.