These mortgage loans can have a fixed period of time from several months to one, two or more years before becoming an adjustable loan. The adjustment of the interest rate of the loan are based upon a pre-determined “index” and a “margin” that is added to the index to determine the adjustment of the interest rate of the loan.

The index can change over a period of time. The margin is set at the beginning of the loan. There are maximum adjustments that can be made on these loans called “caps”. The usual cap is a 2% per year cap and a life of the loan cap of 6% over the start rate of the loan. Regardless of when the adjustment period starts i.e.: the first year or second year or third year of a loan, the lowest change of the margin plus the index or the interest rate plus the cap will change the interest rate of the loan.

There are 3-4 types of index that are used in the banking industry: 1 yr. Treasury, 1 yr. LIBOR, COFI, 30 yr Treasury, Prime rate. These index are money funds that sell on the open market very day and month. To say a ‘1 year T-bill’ is to say that the average of the funds selling every month for one year determines the index.

The Margin is determined by the pricing of the loan. Margin is up to the bank and the product that is being offered. A higher margin could mean a higher change of the interest rate of the loan when the time comes for the rate to change. In some cases, the cap of the loan is the only stop from the rate going higher.

Adjustable mortgages can be fixed for 3 months, 6 months, 1 year, 2 years, 3 years, 5 years and 7 years. Each loan provides a benefit to the interest rate over a 30 year fixed product or due to credit and credit scores is the only loan available to a customer.