In an adjustable interest rate loan, is there a limit as to how high the rate can go?

Hi -Conventional ARM (Adjustable Rate Mortgage) loans do have limits as to how high and to how low the rates will go. Depending on the program the rate will typically stay fixed for a set period of time, there will be a 1st Adjustment that will have a limit (cap) and then each period (usually year) thereafter the rate will be limited in movement by another Cap. An example would be a 5/2/1 Treasury ARM that would have a 5% 1st Adjustment Cap after 5 yrs followed by a 2% rate adjustment cap thereafter. based on the 1 yr Treasury Index. The interest rate based on these caps are determined by a "margin" which is a percentage added to the index to establish the rate. The "margin is typically 1.75% or higher. This margin is one of the least researched by buyers an most used by banks as the higher margin can increase commissions. Great Question.Mark Rodeghiero - Source Mortgage, Inc. Eagle, ID 208-938-2228 3rates.com

Yes.. All ARM rates have a "Fixed" period, an "Adjustment" period, a "Maximum" adjustment per period, and a "Maximum Lifetime" cap on how much the rate can go. Example: 7/1 ARM with 3/2/5 rate caps.. Regarding the 7/1, The "7" indicates the start rate is fixed for the first 7 years. The "1" indicates the rate changes every 1 years. Regarding 3/2/5, the "3" indicates that in the first year of adjustments (beginning of year 8) the rate cannot go up more than 3%, the "2" indicates that each year after the first year of adjustments, the rate cannot increase more than 2%, and the "5" indicates that the rate cannot go higher than 5% over the start rate ever.. this is the lifetime maximum cap. I'm a Broker here in Scottsdale AZ and I only lend in Arizona. If you or someone you know is looking for financing options, feel free to contact me or pass along my information. William J. Acres, Lender411's number ONE lender in Arizona. 480-287-5714 WilliamAcres.com NMLS# 226347

When looking at adjustable loans, there are a few things to look at. First is the caps. You'll see things like 5/2/5, or maybe 1/1/5. The first number is the maximum rate adjustment the first time it adjusts. The second number is the maximum adjustment every year thereafter, and the last number is the maximum it could ever adjust. The next thing to understand is the margin on the loan. Be careful here, watch out for higher margins between lenders. Then finally is the index, which is what future rates will be based on plus the margin. So for example if the loan is based on LIBOR, whatever LIBOR at the time of the adjustment PLUS your margin is what the loan will adjust to - up to the limit per year.