Question:

What is a no-change scenario for an ARM home mortgage loan?

Answer:

A no-change scenario for an ARM home loan means that the ARM index the mortgage is tied to remain stable, and the rate adjustment goes to the ARM index value plus the margin and stabilizes there. The maximum rate adjustment for your ARM in a no-change scenario will reach the fully indexed rate (FIR) and remain there.

No-Change Scenario for a 3-1 ARM Home Loan

Consider a 3-1 ARM with starting rate 5.75%, the ARM index is 6.25% and the margin is 2%. Adjustment cap is 2% and lifetime cap is 11%. With a no-change scenario your adjustable rate mortgage will have the starting 5.75% rate for three years; in month 37 your ARM rate will be 7.75%, in month 49 the rate will be 8.25% and stay there. If you had no adjustment caps, your rate would be 8.25% in month 37.

In a worst case scenario you don't have adjustment caps, and your rate would reach the lifetime cap of 11% in month 37. Or, you have an adjustment cap and in month 37 the rate is 7.75%, in month 49 the rate is 9.75% and the lifetime cap of 11% is reached in month 61.

Borrowers taking an adjustable rate mortgage (ARM) should consider the rate, the period it remains low, any adjustment and lifetime caps, and possible rate change scenarios. If you are planning on leaving the house before the first rate adjustment, you shouldn't bother with ARM scenarios. If you are not sure, it is recommended to see how possibly your ARM rate and payment will look like after one or several adjustments.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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