The starting interest rate of this type of ARM is used to determine the payment of the loan for the first year. The interest rate of this loan changes after the first month or three months of the start of the loan. The payment (not the interest rate) can be fixed for the first year or up to five years. The interest rate does and can change every month for the life of the loan.

Apart from the interest rate changes, the payment of the loan has a change cap of 7.5% of the payment. This 7.5% change has nothing to do with the interest rate changes. This 7.5% only caps the change of the payment of the loan every year or after the promised change of 1,2,3,4, or 5 years. I.e. the payment multiplied by 7.5%, this amount is added to your payment and will be the next year’s payment of the loan.

This loan is offered under several index’s. The margin’s can vary depending on the credit rating of the loan and the pre-payment penalty of 1,2 or 3 years. When the fixed payment does not meet the interest charged on the loan, the difference is added to the balance of the loan. This is called ‘negative amortization’ or the balance of the loan goes up instead of down.

If at any time the balance of the loan is higher than 110% of the original loan offered, the loan is recast into a fully amortizing loan.