The Adjustment Process

As the rate is adjusted at the beginning of each period, the new payment is not calculated on the same 30-year amortization as the beginning payments.

The amortization for the new payment calculation is usually only for the remaining term. The lender, as does the borrower, normally want the loan to be completely repaid within the standard 30-year period.

Consider the following graph of how payments are adjusted at the beginning of each year of a one-year ARM:

ARM Period

Interest Rate

Loan Amount

Amortization Period

Year 1

Start Rate

Original Loan

360

Year 2

Margin + Current Index

Current Balance

348

Year 3

Margin + Current Index

Current Balance

336

Year 4

Margin + Current Index

Current Balance

324

Because the amortization period is constantly decreasing, the monthly payment will remain the same or increase--even as the loan balance decreases or if the interest rate remains the same.

In cases of negative amortization, the loan promissory note will make arrangements for paying the additional balance during the latter years of the loan or as a balloon amount at the conclusion of the term.

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