What are the five parts of an ARM loan?

The five parts of an Adjustable Rate Mortgage (ARM) loan include the program, caps, margin, index, and fully-indexed rate.

The program refers to the specific type of ARM, outlining the fundamental terms of the loan. Caps are essential because they limit how much the interest rate can increase during adjustment periods or over the life of the loan, thus providing some level of protection to the borrower against drastic increases in their payment amount. The margin is the fixed percentage that is added to the index to determine the fully-indexed rate. The index reflects a statistical measure used by lenders to determine interest rate changes, and it typically moves in lockstep with broader market interest rates.

The inclusion of both the margin and fully-indexed rate underscores their importance in calculating the actual interest rate the borrower will pay once the initial fixed-rate period of the ARM ends. This comprehensive understanding of these components equips borrowers to make informed decisions about their mortgage options.