Am I missing something re: how to calcuate my interest rate when it adjusts (based on LIBOR)?

Question

My mortgage doesnt adjust until 2011, but I re-read my mortgage documents last night and think I understand it, but am hoping for someone to tell me that I definetly do understand it correctly. So, my mortgage is currently at 6.65%. My adjustable rate is based on the LIBOR index, adjusts every 12 months at LIBOR+2.25% so lets pretend (for the sake of easy calculation) that the LIBOR rate is 3.5%, would my new rate really be 5.75% or am I missing something?

Answer 1

You are doing it right...What will happen is they will look at the libor the month before you adjustment and add the libor to the margin and that is your new rate. Also look closely at it because chances are your rate will never be below what it is right now, but it should have caps on it where it can not increase or decrease more then 1 or 2% at any time.

Answer 2

You are not missing anything.  that is exactly how you determine your new rate starting in 2011 and every 12 months after that.  Just make sure that you are using the correct LIBOR rate when you estimate your adjustment.  Also, check to see if there is a cap on the adjustment.  Many ARMs will adjust up/down by no more than 2 percentage points.