With the 7/1 Arm, at the end of 7 years (or with a 10/1 arm, at the end of 10 years), the caps kick in. 5/2/5.
First, to understand the index, margin & fully indexed rate.
index is the base index (the cost of funds) for the rate
In this case, Libor Index. (There are a few different Libor Indexes, 1 month, 6 month & 1 year Libor Index). Each of the indexes go up and down
The Libor Index that this loan product uses is the 6 Month Libor index.
The following link will show a history of the 6 Month Libor. Select the 6 Month Libor & choose Jan 1990 through Aug 2011.
This will show you the historical figures of the 6 Month Libor index rate.
margin is the profit on top of the index. (This is a constant figure for the life of the loan)
The Margin and the index combined are what is called “The Fully Indexed Rate”
So the math formula is: Fully indexed rate = Index + margin
The first number refers to the initial cap, the second number to the periodic cap, and the third number to the lifetime cap.
The first figure (5) means the rate can adjust a maximum of 5% for the 1st adjustment at the end of 7 years.
(This all depends on where the index is at that time in date).
2nd # means It will adjust every 2 years (the period).
3rd figure, the life time cap, this means 5% above the initial rate, for the combined 4% + 5 = 9%, the life cap (ceiling).
Read more on Interest Rate Cap Structure:
Note: If the index & the margin cannot increase more than the ceiling (the initial rate + the 3rd #, which is the life cap of the loan).So these are things to consider, between a 7/1 & a 10/1 Arm.The 7/1 is lower for the first 7 years.
the 10/1 will give you a longer duration of time that is guaranteed to have a lower rate.