If you have a 5 Yr. Adjustable Rate Mortgage (ARM) which will reset in March 2008, you need to start going over your loan documents and look for a document called the “ Rate Rider Note.” I believe that is what it is called. Anyway, look through that document, which will tell you what index rate and margin your loan is tied to. Since you have a 5 year ARM your mortgage can either be tied to the 6 month LIBOR, 12 month LIBOR, or MTA inex rates. Your margin can range anywhere from 2.25% to 2.75% depending on what index rate your ARM is tied to.
If your ARM is tied to the 6 month LIBOR, your mortgage will adjust every 6 months once the loan starts to adjust. Your margin will probably be 2.5% with caps of 6/2/6. If your ARM is tied to the 12 month LIBOR, then your loan will adjust every 12 months and will be tied to a 2.25% margin with 5/2/5 caps. If your ARM is tied to the MTA, then it will adjust every 12 months with a 2.75% margin.
The most volitale of this index rates are the LIBOR index rates. They will decrease and increase faster than the MTA. If you compare these index rates with a roller coaster, the LIBOR will be the front of the train and the MTA will be the back of the train. The LIBOR will experience a faster change than the MTA.
The bank should notify you by mail about one to two months before your loan adjusts. They tell you how much your new payment will be along with the new interest rate. They will also tell you how long it is fixed for.
You should really sit with a Mortgage Planner who will explain your loan to you. In fact you let your Mortgage Planner manage your equity and have your Mortgage Planner send you a Rate Watch Review every month so you have that window of opportunity to refinance before you get to the reset period.
Based on your question, I am assuming that the mortgage you really have is a five-year arm. This means that your interest rate is fixed for five years and adjusts periodically thereafter. In order to find out what will happen, you need to know a few things. Most of them are described in the note. I’ll go through them one by one.
The first thing, which you already know, is the period for which the loan is fixed. In your case, you say it is five years.
The second thing you need to know is the adjustment period. Usually this period will be either one year or six months. That means that in the case of a five-year ARM, your rate will adjust at the end of five years and every six months or one year thereafter, depending on the adjustment period described in your note. A five-year ARM that adjusts yearly is typically referred to as a 5/1 ARM. One that adjusts every six months is referred to as a 5/6 ARM.
The next thing you’ll need to find out is the formula described in your note for calculating the interest rate. Usually this formula is very simple: index plus margin. The index is an interest rate which is objectively determinable, well-known, and published. One such index is LIBOR (London Interbank Offering Rate), the rate at which banks lend money to each other in the London market. Another index is the MTA, which is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. The margin is a constant that gets added to the index to get the rate. So, if the index at the time your interest rate is going to adjust stands at 4% and the margin is 2%, your interest rate would be 6%.
The last thing you need to know is the rate cap structure. The rate cap structure tells you the most your interest rate can go up on the first adjustment, for every adjustment thereafter and the maximum the rate can go up over the life of the loan. For an in-depth explanation of rate-caps, take a look at the article I wrote on the subject which you can find here.
When calculating your new interest rate, be sure to read your loan documents to find out all of these factors. While it may be true that most five-year arms are written with a 5/2/6 rate cap structure nowadays, for example, it does not mean that it was necessarily so when you got your loan. Only a careful reading of your loan papers will tell you for sure.