How adjustable-rate mortgages really move
The margin and the guardrails
In brief
The margin is a fixed number added to the index at each adjustment; it does not change over the loan. Caps limit movement: the first number caps the first adjustment, the second caps each later one, and the third caps total change over the life of the loan. A 2/1/5 structure means up to two points at first, one point at each later adjustment and five points in total above the start.
Last reviewed against the primary sources listed below.
Reading a cap structure
| Position | Limits | Example 2/1/5 |
|---|---|---|
| First | First adjustment | Up to 2 points |
| Second | Each later adjustment | Up to 1 point |
| Third | Lifetime above the initial rate | Up to 5 points |
Floors
Many ARMs also have a floor, often the margin, below which the rate cannot fall.
Source
See the CFPB on caps.
ARM questions
Do ARM mortgages have a cap?
Most do: an initial adjustment cap, a periodic cap and a lifetime cap, stated in the loan documents.
Does the margin ever change?
No. It is set in your note for the life of the loan.