California Mortgage Solutions
(805) 704-9093Apply now
A rate that adjusts

An adjustable-rate loan can suit a borrower who does not expect to keep it long

An adjustable-rate mortgage holds its rate at an agreed figure for an opening period, and then adjusts on a schedule for the rest of the loan. Each adjustment is worked out from a published index plus a margin written into your loan documents, and caps limit how far the rate can move. It can be the right loan when you do not expect to hold it past the opening period. The risk is the obvious one: plans change.

Ask us to compare bothCall (805) 704-9093

The program in one box

What it is
A mortgage whose rate holds at an agreed figure for an opening period and then adjusts on a set schedule for the rest of the loan.
Who it is for
A borrower who expects to sell, pay off or refinance before the opening period ends, and who could still carry the loan if that did not happen.
How an adjustment is worked out
A published index plus a margin. The index moves with the market.
The margin
Set at the start and does not change for the life of the loan. It is what the lender adds to the index, and it is written in the note.
Caps
Three kinds: a limit on how far the rate can move at the first adjustment, a limit on each adjustment after that, and a limit across the life of the loan.
Qualifying
On a loan for a home you live in, the lender still has to make a reasonable, good-faith determination that you can repay the loan, under the ability-to-repay rule at Regulation Z 1026.43.
The risk
If you still hold the loan when the opening period ends, the rate can move and the payment can move with it. Plans change, and this is the program where that costs money.
What we put in front of you
On a home you live in, Regulation Z requires the lender to give you a written explanation of the index, how the margin is applied and any limits on rate changes, around the time you apply.

What this program is good at

  • The loan makes sense only when you expect to keep it for less than the opening period.
  • Everything that drives an adjustment is written down: the index, the margin and the caps, so the mechanism can be checked rather than discovered.
  • The caps have a known shape: how far at the first adjustment, how far at each one after, and how far across the life of the loan.
  • On a home you live in, a federal rule, not only a lender's preference, requires the lender to determine that you can repay the loan.

Who qualifies

What a lender weighs before this program is on the table. A lender can add rules of its own, and those rules can differ from one lender to the next.

The program underneath

An adjusting rate is a feature rather than a program of its own. It is written inside a conventional, jumbo or government loan, and that program's rules on credit, income, occupancy and property still decide the file.

Ability to repay

On a loan for a home you live in, Regulation Z 1026.43 requires the lender to make a reasonable, good-faith determination that you can repay the loan according to its terms. That is federal law, not a lender's preference.

A plan that survives the opening period

Ask yourself what happens if you still own the home when the rate starts adjusting. If the answer is uncomfortable, the loan is probably wrong for you, and that is better found out now than in escrow.

Reserves, and your own tolerance

A lender may want to see savings behind the file, and you need the stomach for a payment that can move. Both are worth testing against your own budget before the rate becomes the thing you are shopping.

How it works with us

What happens once you get in touch

The steps in order, so you can see what is coming. Nothing here is underwritten until a lender underwrites it.

  1. Tell us your horizon

    How long you expect to own the home, and how likely that is to change. The whole decision turns on this question, so it comes first rather than last.

  2. We price it both ways

    The adjusting option and the one that does not adjust, from the lenders on our panel, on your actual file. We publish no rates on this site.

  3. The lender's written disclosures

    On a home you live in, Regulation Z requires the lender to explain the index, how the margin is applied and any limits on rate changes, in writing.

  4. You decide with the documents in hand

    Nothing on this loan adjusts in secret. If you take it, you take it knowing the schedule.

What people ask about this program

If yours is not here, call us. The useful answer depends on your file.

How does an adjustable-rate mortgage work?

The rate holds at an agreed figure for an opening period, and then adjusts on a set schedule for the rest of the loan. Each new rate is worked out from a published index plus a margin written into your loan documents, and caps limit how far the rate can move at the first adjustment, at each later adjustment, and across the life of the loan.

What are the index and the margin on an adjustable-rate loan?

The index is a published interest-rate measure the loan follows. The margin is what the lender adds to that index to set your rate at each adjustment. The index moves with the market; the margin is set at the start and stays where it is. Both are named in your loan documents.

What are the caps on an adjustable-rate mortgage?

There are three kinds. One limits how far the rate can move at the first adjustment, one limits each adjustment after that, and one limits how far the rate can go across the life of the loan. The caps your loan has are stated in your loan documents.

Who should consider an adjustable-rate mortgage?

A borrower who does not expect to hold the loan past the opening period because they plan to sell, pay it off or refinance, and who could still carry the loan if that plan changed. The risk is simply that plans change. If you expect to keep this loan for the long run, say so, and we can show you the loan that does not adjust instead.

Does an adjustable-rate loan let me qualify for a larger loan?

It can, depending on the loan. The ability-to-repay rule at Regulation Z 1026.43 requires the lender to make a reasonable, good-faith determination that you can repay the loan, and the rate your qualifying payment is figured at depends on how long the opening period lasts and on the program's guidelines. The standard you are underwritten against does not change.

Not government-insured

Conventional loan

A loan for solid credit and income, with private mortgage insurance that does not have to be permanent.

  • Private mortgage insurance does not have to be permanent. On a one-unit home you live in, the Homeowners Protection Act of 1998, subject to its conditions and exceptions, gives you the right to ask for borrower-paid mortgage insurance to come off once the loan is paid down far enough against the home's original value, and requires it to end automatically at a later point on the loan's amortization schedule.
  • It works for a primary residence or an investment property of one to four units, and for a one-unit second home. FHA and VA are built for a home you live in; FHA allows a second home only in narrow hardship cases.
  • There is no federal credit floor on a conventional loan, and Fannie Mae's Desktop Underwriter sets no minimum score of its own: it weighs the credit with its own risk factors and returns what the file needs.
More about Conventional

Above the conforming limit

Jumbo loan

For a loan above the county's conforming limit, where each lender writes its own guidelines.

  • It is a loan for a purchase whose loan amount clears the county's conforming limit.
  • Because jumbo guidelines are set lender by lender, a file one lender turns down can fit another lender's guidelines.
  • Reserves, income documentation and appraisal practice are each set lender by lender, so they are worth settling before a jumbo file goes anywhere.
More about Jumbo

Government-insured

FHA loan

Government-insured, with credit score tiers HUD publishes.

  • FHA publishes its own credit floor, so you can find out where you stand before any lender's opinion enters it.
  • The 203(k) option finances a house that needs work and the work itself in one loan.
  • An FHA streamline refinance exists for a loan that is already FHA, if the loan meets FHA's conditions at the time.
More about FHA

Where this program fits:Buying a homeRefinancingThe county's loan limitsThe Central CoastServices

Published by

California Mortgage Solutions Inc. · Company NMLS #325189

This page is general information about a loan program, not an offer of credit or a commitment to lend. What a lender will do with your file depends on the file.

Tell us about your file

Answer a few questions and your loan officer can talk you through which programs could fit your file, including when this one does not.

Start my applicationCall (805) 704-9093

No credit pull to get started. This is not a commitment to lend. Equal Housing Opportunity.