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To determine the rate on your adjustable mortgage, you first need to understand how an ARM works.

The following terms are integral to an ARM:

Fully Indexed rate - the rate you must pay, barring any periodic caps, in order to fully amortize or pay off the loan.

Margin - the fixed component of your ARM loan, constant throughout the life of the loan.

Index - the variable component of your ARM loan, changes on a monthly basis. Examples of indices include the Cost of Funds (11th District), One Year Treasury, Monthly Treasury Average (MTA), 1 Year Treasury Average, CD, LIBOR, etc.

You should be familiar with the following ARM terms:

Teaser Rate - (aka your loan's start rate) the initial rate on your adjustable, prior to its first adjustment date, typically 6 months to a year.

Lifetime Cap - the maximum rate that your adjustable may climb to.

Floor Rate - the minimum rate that your adjustable may fall to.

Periodic Caps - the maximum percentage that either your rate or payment may change in any given year or specified time period. (See Interest Rate Cap and Payment Cap).

Interest Rate Cap - a periodic cap describing the maximum percentage that your rate may change in any given year or specified time period. Interest capped ARM's typically do not have negative amortization.

Payment Cap - a periodic cap describing the maximum percentage that your payment may change in any given year or specified time period. Applies to ARM loans with the potential for negative amortization.

Rate Change at the First Adjustment Date - usually applies to intermediate ARMs and can exceed the annual or semi-annual caps. Ask what it is.

Negative Amortization - occurs when the effective interest rate associated with a payment cap on an ARM is less than the fully indexed rate. In other words, the minimum payment allowed by the lender is less than the actual payment that is due. This difference or spread is then added onto the borrowers loan balance and rather than amortizing or paying down the loan balance, the loan balance actually grows.

When rates are on the rise many homeowners decide that they would rather have a fixed rate mortgage. The dilemma they find is that the fixed rate they wish to refinance into is also going up. If you have an intermdiate ARM that is in its initial fixed period you may want to refinance out of it before the first adjustment. Be sure to find out how much your rate can go up at the first adjustment. Some loans have a max adjustment of 2% while some go up by as much as 5%.