Tip 1: ARM holders
can reduce the impact of worst-case rate hikes by saving
money during their initial low-payment period, paying down
their loan balances and budgeting.
Most ARM rates are
tied to the performance of one of three major indices. Track the indices here.
They are:
-
The weekly constant
maturity yield on the one-year Treasury Bill
The yield debt securities issued by the U.S. Treasury
are paying, as tracked by the Federal Reserve Board
-
The 11th District Cost
of Funds Index (COFI)
The interest financial institutions in the western U.S.
are paying on deposits they hold
-
The London Interbank
Offer Rate (LIBOR)
The rate most international banks are charging
each other on large loans
Tip 2: Caps
come in a couple of different forms.
The most common are:
-
Periodic rate cap
Limits how much the rate can change at any one time. These
are usually annual caps, or caps that prevent the rate
from rising more than a certain number of percentage points
in any given year.
-
Lifetime cap
Limits how much the interest rate can rise over the life
of the loan.
-
Payment cap
Offered on some ARMs. It limits the amount the monthly
payment can rise over the life of the loan in dollars,
rather than how much the rate can change in percentage
points.
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