Basically an ARM, also known as an adjustable rate mortgage, rate is calculated by adding your index rate, which will be based on Prime, LIBOR, COFI, MTA, etc... and your margin. This will determine your interest rate. Your margin is a fixed number that will not change and is simply added to your index rate. Your index rate is the part of the rate that adjusts each adjustment period.

Written in the mortgage ARM rider will be information on when the interest rate will change, how frequently it will change and what the maximum increase can be on the first adjustment period. The ARM rider will also tell you what your margin is and index to add to the margin in order to get adjusted interest rate. In the ARM rider there will also be a rate ceiling instead, this is the highest interest rate that your ARM can adjust up to.

The information includes the following information:

• Start Rate
• 1st Adjustment Date
• Adjustment Period

• 1st Adjustment Cap
• Regular Adjustment Cap
• Floor Rate

• Ceiling Rate
• Margin
• Index

Many Adjustable Rate Mortgages (ARM) are actually "Hybrid" mortgages. They have an initial fixed rate period in the first 2, 3, or 5 years before converting to an ARM. In most cases, prudent homeowners would not allow their mortgages to reach the adjustable period because the fully indexed rates are usually higher than that of the initial fixed rates. Most would refinance out of the adjustable rate mortgages.

ARM loans, and fixed rate loans as well, which allow a borrower to defer interest for the first few years will have anegative amortization recast feature as well, at which point the loan will re-amortize and in some cases the rate will be re-calculated. Most fixed rate loans which allow deferred interest do not re-calculate the rate upon recast.

After Calculating the Ajustable Rate Payment, many borrowers find that when ARM rates are much lower than FRM rates, shrewd borrowers take an ARM but make the payment that they would have had to make had they taken an FRM. By paying the balance down faster, the cost imposed by rising rates in the future is reduced.