ARM Type

• There are two main different types of ARMs available for your mortgage. The standard ARM adjusts every 12 months. The rate you chose when you initially closed your loan should have been much lower than virtually any other rate available. Hybrid ARMs offer longer initial fixed rate terms than standard ARMs provide. Most lenders offer Hybrid ARMs with fixed rate periods of 3, 5, 7 and 10 years. The interest rate is higher than a standard ARM but lower than a 30 year fixed rate mortgage. Your interest rate remains fixed during the initial period and then adjusts annually thereafter.
  
  

ARM Index

• ARMs interest rates are based on an index. An index is a financial guide such as the prime rate or the London Inter-Bank Offering Rate (LIBOR). Most first mortgages offer by Fannie Mae and Freddie Mac use the one-year LIBOR as their index. As the index rises or falls, so will your interest rate. Compare the indexes' stability when comparing different ARM types.
  
  

ARM Margin

• ARMs also have a margin, which is added or subtracted from your index to calculate your interest rate. Most first mortgages require margins that are added to the index. Some second mortgages such as Home Equity Lines of Credit (HELOCS) may have margins that subtract from the index. If your margin was 2 percent and your index rose to 4 percent, then your interest rate would change to 6 percent. If your margin was -.5 percent and your index rose to 4 percent, than your interest rate would be 3.5 percent.
  
  

Paying Discount Points

• Discount points are paid when a loan is first closed. One point is equal to 1 percent of the loan amount. One point does not equal 1 percent in interest rate. On fixed-rate home loans, paying one discount point might lower your interest rate by 0.125 to 0.375 percent. Depending upon which ARM program you choose, one discount point may lower your interest rate as much as 0.875 percent. Consider paying discount points when you choose a hybrid ARM with an initial rate period of 5-years or longer.