10 / 1 yr ARM

[SunnySideUp32]

Can someone please explain in layman terms what is a 10/ 1 yr ARM and if it is a good idea?

 

Rate caps = 2% at the first adjustment 2% thereafter.

6% lifetime cap

Index = 1 yr. t-bill

Margin = 2.875%

 

On a 172,000 loan for either 15 or 30 years.

 

Just beginning my research for the next year or so.

[lakpr]

It means that your interest rate is fixed for the first 10 years, and will adjust up to 2% thereafter, and the amortization is based on either 15 or 30 year term. But the maximum interest rate will never be greater than 6% more than the current rate.

 

Current 1-year t-bill rates are at 0.125% approximately, so I think your initial interest rate = 3% which will be fixed for 10 years. In the 11th year it will be upto 5% (worst case scenario), in the 12th year it will be 7% (worst case scenario), and in the 13th year it will be 9% (again a worst case scenario).

 

Usually the payments on ARMs are based on 30-year amortization schedule

 

Assuming your principal loan amount of $172,000 and not including any other considerations such as closing fees, property taxes, PMIs etc., assuming you never refinance and you live in the same house for full 30 years .....

 

with 10/1 ARM @ 3% rate: Your monthly payment will be $725 a month, at the end of 10 years your principal balance is $130754. In the 11th year, assuming the worst case scenarios play out, your monthly payment will jump to $863; in the 12th year to $1007; in the 13th year to $1157, and remains constant thereafter. Loan gets paid off at the end of 30 years. You'd have paid a total somewhere north of $187000 in interest.

 

With the current rates, for someone with good to excellent credit history, the fixed mortgage rates are around 3%-3.25% for 15 years and 3.625% to 3.875% for 30 years.

Assuming 15 year rate of 3.25%, your monthly payment is $1210 for full 15 years, with a total interest paid over the life of the loan: $45,500

Assuming 30 year rate of 3.875%, your monthly payment is $809, with a total interest paid over the life of the loan: $119250.

 

I have rounded up all figures in the calculations above.

[SunnySideUp32]

It means that your interest rate is fixed for the first 10 years, and will adjust up to 2% thereafter, and the amortization is based on either 15 or 30 year term. But the maximum interest rate will never be greater than 6% more than the current rate.

 

Current 1-year t-bill rates are at 0.125% approximately, so I think your initial interest rate = 3% which will be fixed for 10 years. In the 11th year it will be upto 5% (worst case scenario), in the 12th year it will be 7% (worst case scenario), and in the 13th year it will be 9% (again a worst case scenario).

 

Usually the payments on ARMs are based on 30-year amortization schedule

 

Assuming your principal loan amount of $172,000 and not including any other considerations such as closing fees, property taxes, PMIs etc., assuming you never refinance and you live in the same house for full 30 years .....

 

with 10/1 ARM @ 3% rate: Your monthly payment will be $725 a month, at the end of 10 years your principal balance is $130754. In the 11th year, assuming the worst case scenarios play out, your monthly payment will jump to $863; in the 12th year to $1007; in the 13th year to $1157, and remains constant thereafter. Loan gets paid off at the end of 30 years. You'd have paid a total somewhere north of $187000 in interest.

 

With the current rates, for someone with good to excellent credit history, the fixed mortgage rates are around 3%-3.25% for 15 years and 3.625% to 3.875% for 30 years.

Assuming 15 year rate of 3.25%, your monthly payment is $1210 for full 15 years, with a total interest paid over the life of the loan: $45,500

Assuming 30 year rate of 3.875%, your monthly payment is $809, with a total interest paid over the life of the loan: $119250.

 

I have rounded up all figures in the calculations above.

Thank you so much for taking the time to answer my question. I understand completely and when my credit files are clean and my score recovered, I'm not considering ARMs.