How do you calculate a five-year ARM mortgage?


Quick Answer

A five-year Adjustable Rate Mortgage (ARM) is calculated based on the assumption that the interest rate remains fixed for five years followed by an index-dependent periodic amortization, when the interest rate becomes adjustable, according to Bankrate.com. Payments are then calculated based on the periodicity prescribed by the loan product.

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Full Answer

The payments of a five-year ARM are calculated based on three factors that affect the interest rate: the initial fixed rate, the fixed margin and the variable index, according to mortgage marketplace Zillow.com. The initial fixed rate remains in effect for the initial five-year period of 60 monthly payments, after which the loan becomes adjustable for the life of the loan, according to Bankrate.com. The adjustable rate is usually calculated as the sum of the fixed margin, between 2 and 3 percent, on the loan and the variable index rate.

The index rate of most ARM loans is based on one of several indices published in the United States including the London Interbank Offered Rate (LIBOR), the one-year Treasury Bill (T-BILL) rate, the 11th District Cost of Funds Index (COFI), or the One-Year Treasury Constant Maturity index, according to Bankrate.com and SFGate.com. Once the loan becomes adjustable, the frequency of the next adjustment is also specified as 5/1, where 5 indicates the fixed rate period and 1 indicates that the index rate is adjusted once a year, according to Forbes.com.

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