Question:

How to avoid a Worst-Case Scenario ARM?

Answer:

When you are buying an ARM, it is crucial to look at a worst-case scenario. ARM worst-case scenarios will show you how much time it will take for the loan interest rate to reach the lifetime cap of the loan.

ARM Worst-Case Scenario Example

Imagine you have a 3/6 ARM with 5% starting rate, 6% index rate, 3% margin, 1% adjustment cap and 11% lifetime cap. The worst case scenarios would be to reach the lifetime cap of the loan as soon as adjustment begins. A 3/6 ARM will adjust every 6 months after the fixed period is over.

 For example, in month 37 your ARM rate will be 6%; in month 43 it will be 7%, etc. Your rate will go up with 1% every six months after adjustment is allowed and the lifetime cap of the loan will be reached in month 61.

Knowing your ARM adjustment dates and possible worst case scenarios allows you to plan on selling the house, or refinancing once the interest rate begins to adjust.

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