When a loan offer is for an adjustable-rate mortgage, or ARM, the Loan Estimate bestows ample documentation.
ARM information on Page 1
Page 1 of Loan Estimate form
The “Loan Terms” section provides basic information about the ARM’s core features:
- If the loan is an ARM, the word “yes” will appear next to the interest rate, to indicate that the interest rate can increase after closing.
- This box describes how often the interest rate will be adjusted, how high the interest rate can go and in which year of the loan it can reach that maximum interest rate.
- With an ARM, the word “yes” will appear next to the monthly principal and interest, to indicate that the monthly payments can increase after closing.
- This box describes how often the payment can change, how high the principal and interest can go and in which year of the loan it can reach that maximum principal-and-interest payment.
ARM information on Page 2
Page 2 of Loan Estimate form
The bottom of Page 2 has a pair of sections that provide details of the ARM’s features.
- The “Adjustable-Interest Rate (AIR) Table” describes the index and margin, initial interest rate, the minimum and maximum interest rates allowed during the life of the loan (the lifetime caps), when the rate can be adjusted for the 1st time and how often it can be adjusted thereafter, and how much the interest rate can go up or down in each adjustment (periodic caps).
- The “Adjustable-Payment (AP) Table” describes whether the loan allows interest-only payments and other exotic payment features. It describes the minimum and maximum principal-and-interest payment after the 1st adjustment, and the maximum possible principal-and-interest payment if the interest rate maxes out.
For explanations of indexes, margins and rate caps, read the basics of adjustable-rate mortgages.
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