Index, margin, timing, and caps
After the initial period, the note generally calculates an ARM rate from a published index plus a margin, subject to its adjustment limits, floor, rounding, and other terms. The first-adjustment cap, later periodic cap, and lifetime cap do different jobs. Read the Loan Estimate's Adjustable Interest Rate table and the program disclosure, not just the starting payment.
- The 5/6 structure in the disclosed illustration below fixes the initial rate for five years, then adjusts every six months; verify the actual note.
- A first-adjustment cap is not a lifetime payment guarantee. Recalculate payment using the remaining balance and remaining amortization term.
- Selling or refinancing before an adjustment is not assured. Compare an affordable adverse scenario without assuming an exit.
Example: the first adjustment
Index plus margin is initially 7.5%, but the 2-percentage-point first-adjustment cap limits the first reset to 7%; six months later, the 1-point subsequent cap permits 7.5%. These are teaching assumptions, not available rates or a forecast. Example assumptions: $400,000.00 loan, 20%/$100,000.00 down; 30-year 5/6 ARM; $0 prepaid charges, no points/MI; 6.495% APR, may increase. Monthly P&I: months 1–60 $2,147.29 at 5.000% interest, 61–66 $2,596.11 at 7.000%, 67–360 $2,712.87 at 7.500%; first due in one month, no balloon. Initial index 5% held constant + 2.5% margin; six-month resets after year five, 2/1/5-point caps, 10% ceiling, 2.5% floor, no rounding/carryover. APR/payment may rise with index; not a forecast. Taxes, insurance/HOA excluded; actual payment higher. Not a quote/approval; rates change daily; your terms will differ.
Read the caps, then test the worst case
In the same fully disclosed illustration immediately above, 2/1/5 caps allow up to 2 percentage points at the first adjustment, 1 at each later six-month adjustment and 5 above the initial 5% over the loan's life: a 10% lifetime ceiling. The assumed floor is the 2.5% margin. The APR schedule holds the initial index constant; it is not a forecast, and a different future index can produce higher payments, up to the note's limits. Your note controls.
- Ask us to show the payment at the lifetime cap using the remaining balance and term. If that would break your budget, compare fixed-rate financing.
- APR is a comparison calculation, not a prediction of future index changes. Read the APR vs interest rate guide as well as the ARM disclosure.
