What The Heck Is A 1 Year ARM

The 1 year  ARM is a 30 year loan that has a fixed interest rate for the first year and then adjusts once a year up or down for the remaining 29 years.

The interest rate for a 1 year ARM can be up to a full 1.75% lower than the 30 year fixed mortgage rate. If you are planning on selling or refinancing with in 2 years than this is the loan I would recommend.

The 1 year ARM, as with most adjustable rate mortgages, has caps and margins. Meaning that the interest rate can only adjust a maximum (up or down) for each adjustment period. And there are limits on how much it can adjust up or down over the life of the loan.

So for example lets say the one year ARM has caps of 2% and 6%. What this means is that the loan can only adjust a maximum of 2% (up or down) each year after the first seven years. It also means that the loan can only go up a maximum of 6% over the entire life of the loan.

The interest rates for the one year ARM is determined by combining the index + the margin.

There can be a variety of indexes used. The LIBOR index, 1 year treasury index, T-Bill index, etc. These indexes are what adjust the interest rate. The margin is the fixed portion if the interest rate.

For example let’s say at the time of your 1 year ARM rate lock, the index used is at 1.25% and the margin is 2.00%. Your interest rate would be 3.25%.

Using the example above your  1 year ARM has caps of 2% and 6% and your interest rate is 3.25%.

The lowest your interest rate will ever go is 3.00% because that is the margin. But to get that interest rate the index would have to be zero. Which we both know will never happen.

Let’s assume the index has risen to 3.5%. Your interest rate after the first year would now be 5.25% because it can only adjust a max of 2% per adjustment. Assuming worse case scenario your interest rate could be 9.25% after the end of 4 years because there is a cap of 6% over the initial interest rate.