A borrower received a 30-year ARM mortgage loan for $120,000. Rate caps are 3/2/6 (first adjustment/subsequent adjustments/total over the life of the loan). The start rate was 3.50% and the loan adjusts every 12 months for the life of the mortgage. The index used for this mortgage is the LIBOR, which, for this exercise, let’s say was 3.00% at the start of the loan, 5.00% at the end of the first year, and 4.50% at the end of the second year. The margin on the loan is 3.00%, which remains the same for the duration of the loan.
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