What is a 5 1 libor arm

what is a 5 1 libor arm

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The interest Rate is Fixed for the first 5 yr years of the loan. At the end of 5 years your loan becomes a 1 year adjustable rate.

If considering a 5/1 ARM thing that you will want to pay close attention to are:

1. Interest Rate Caps- With and FHA loan the caps are 1/5 meaing at the end of 5 years your RAte can adjust no more than 1% up or down and then annually max life time caps is 5%. With Convnetional & Jumbo ARMS you need to be more careful as the loan caps are typically 5/2/5. Maening that at the end of the 5 years rate can potentially increase by 5% if all heck breaks lose, then 2% annualy and no more than 5% above the start rate.

2. What is the Floor

Rate. This is the lowest your rate can ever decrease to. Need to be careful here on Jumbo and Portfolio loans as many times the floor rate is the Start Rate. Meaning you only share in the risk of the rate rising and don'

t share in any reward should the rates decrease from your start rate.

3. Index this is what your interest rate adjusts are tied into. Many typical ones are the libor (london inter bank offer rate), t-bill, or a cost of funds index. YOu will want to view the historical data on the index so you can how how volitile the index is.

4. Margin: what percent your rate will float above the index. Should be in the range of 2.25 to 2.5, however some jumbo's and portfolio products will be higher due to lack of PMI or a higher Loan to value.

Just understand what you are getting into. ARMS aren't bad programs as long as you understand what you are getting. IF you only plan to be in the house or mortgage for 5 years a 5 or 7 yr ARM may not be a bad program for you to consider.

    March 22 2011

Source: www.zillow.com

Category: Forex

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