How is the 6th year on a 5/1 ARM calculated?
Given a 5/1 ARM for a 0,000 loan at a rate of 2.875%:
After 5 years of paying at 2.875%, let's say the balance is 0,000.
On the 6th year, the first adjustment kicks in an kicks the rate up 1% to 3.875%.
How is the new payment calculated? 3.875% on the 0,000 balance for 25 years? 3.875% on the 0,000 for 25 years? 3.875% on the 0,000 for 30 years?
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The payment is amortized based on the remaining principal and term of the loan.
So in your example, the payment in year 6 is calculated using 3.875%, 0,000 and 25 years.
By the way, the initial payment is 52.12, with an exact amount after 5 years of 0,458.36. At 3.875%, the payment for year 6 jumps to 17.36, an 11% increase. By year 10, the maximum rate of 7.875 (I assume a 5% cap) produces a payment of 07.75 nearly 60% higher than the original payment. With 30 year fixed rates under 5% today, the savings of 2% in the first years isn't worth the risk, in my humble opinion. (Disclaimer - I am looking at this very option. I have 7 years left on my loan. I'd keep the same payments, and after year 5, have less than 2 years remaining. at that point, the higher rate won't really matter, as year 6 and the partial 7th year will be lower than my current rate. But for those who will keep the mortgage longer than 5-7 years, it's rolling dice.)
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