Calculating the new payment when ARM resets

Don TaylorDear Dr. Don,
My 5/1 adjustable-rate mortgage, or ARM, will soon change its interest rate for the first time. The margin is 2.75 percent, and the loan is tied to the one-year Libor benchmark interest rate, which is 1.05 percent as I write this. The loan balance is $442,000. What would my new payment be?

Thank you,
-- Darren Redo

Dear Darren,
You'll have to check your loan documents to see what date the loan uses to peg the one-year Libor rate (a 45-day look-back is common) and which one-year Libor rate the loan uses.

Typically, loans use the one-year Libor rate posted by The Wall Street Journal. The Wall Street Journal rate also is reported on Bankrate. You'll want to review your loan documents to see if there is a floor, or minimum interest rate, on the loan.

I'm assuming you originally took out a 5/1 ARM with a 30-year amortization schedule. You're five years into the loan at its first interest rate reset, so the loan now has a 25-year amortization. Plug the amount of time, the margin and the Libor rate into one of Bankrate's adjustable-rate mortgage calculators, and it will tell you the amount of the mortgage payment when the loan resets.

I like the "How much higher will your rate go?" calculator for its simplicity, and because it pulls up the current Libor or other pricing index value. It works even if the rate isn't going higher.

Using the 1.05 percent Libor rate, the 2.75 percent margin and a 25-year amortization schedule for a loan balance of $442,000, I came up with a new mortgage payment of $2,284.51 using the Bankrate calculator.

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