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Adjustable Rate Mortgages have 4 main features, the first is called Margin, the second is called Index, the third is called Caps, and the forth is called the Initial Fixed-Rate Period of the loan.   Those  words probably mean very little to you, so let’s take a look at what they mean.

Margin: This is the fixed or constant portion of your adjustable that never changes. It stays the same for the duration of your loan. The Index is your variance. This is the portion of your Adjustable that makes it an Adjustable. If you take this fixed Margin and add it to the varying Index, you derive your interest rate. Accordingly, Margin + Index = Interest Rate.

Index: There are many different indexes, but the most common are the LIBOR (London Interbank Offered Rates) and CMT (Constant Maturity Treasury

Caps: The caps on an adjustable rate mortgage determine how much your rate can adjust, up or down, on the first adjustment, subsequent adjustments and for the life of the loan. So when you see caps that show 2/2/6, this means that the rate can adjust a maximum of  2% on the first adjustment, 2% on subsequent adjustments and 6% over the life of the loan. The rate can never be lower than the margin (floor).

Fixed Rate Period: This if the number of years that the initial interest or note rate is fixed, prior to adjustments. For example: a 3/1 ARM means that the rate is fixed for the first 3 yrs, a 5/1 ARM means that the rate is fixed for the first 5 years, and so on.

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