3/1 ARM Loan — 15-Year Term

A 3/1 ARM is an adjustable-rate mortgage (ARM) that has an initial interest rate for the first three years, and thereafter adjusts each year. Each annual rate adjustment is based on (or "indexed to") another rate — often the yield on a Treasury note plus a margin. The rate can only change within limits — by a specified amount each year, and a specified amount over the life of the loan (15 years). Since interest rates can change after the first 3 years, the monthly payment will increase if rates go up and will be reduced if rates fall.

Variable Rate Mortgage Program Disclosure - 3/1 ARM

This disclosure describes the features of the adjustable-rate mortgage (ARM) program you are considering. The interest rate, payment amount or term of your loan are subject to change. Information on other ARM programs is available upon request.

How Your Interest Rate and Payment Are Determined

Your interest rate will be based on an index plus a margin.

Your payment will be based on the interest rate, loan balance, and loan term.

The interest rate will be based on the weekly average yield on the United States Treasury Securities adjusted to a constant maturity of one year plus our margin. Ask for our current interest rate and margin.

Information about the index is published weekly in the Wall Street Journal.

Your interest rate will be equal to the current index rate plus the margin rounded to the nearest one-eighth of one percentage point (0.125%).

Your initial interest rate is not based on the index used to make later adjustments. Ask us for the amount of current interest rate discount or premium amount.

How Your Interest Rate Can Change

Your interest rate can change every 12 months after 36 payments.

Your interest rate cannot increase or decrease more than 2 percentage points at each adjustment.

Your interest rate cannot increase or decrease more than 6 percentage points over the term of the loan.

Your interest rate will be rounded to the nearest one-eighth percent at each adjustment.

How Your Payment Can Change

Your payment can change every 12 months after 36 payments based on changes in the interest rate.

Your monthly payment can increase or decrease substantially based on periodic changes in the interest rate.

You will be notified in writing 25 days before the due date of a payment at a new level. This notice will contain information about your interest rates, payment amount, and loan balance.

For example, on a $10,000 loan with an initial interest of 8.25%, the maximum amount that the interest can rise under this program is 6 percentage points, to 14.25%, and the monthly payment can rise from a first-year payment of $75.13 to a maximum of $117.58 in the sixth year. To see what your payments would be, divide your mortgage amount by $10,000; then multiply the monthly payment by that amount. (For example, the monthly payment for a mortgage amount of $60,000 would be: $60,000 ÷ $10,000 = 6; 6 x $75.13 = $450.78 per month.)

Advantages:

You want lower initial monthly payments than a fixed-rate mortgage usually offers.
You can afford to pay a higher monthly payment versus a 30-year term because you will pay less interest over the life of the loan.

Disadvantages:

Interest rates can be higher than the current fixed rates over time.
It’s riskier if you don’t think your income will increase over the initial 3-year period to cover the change in the monthly payment for the remaining life of the loan.

ARM Features:

Rate caps = 2% per adjustment and 6% over the lifetime of the loan
Index = 1 year Treasury bill
Margin = 2.75%

Consumer Handbook on Adjustable Rate Mortgages [PDF] is available online for further reading, hosted by The Federal Reserve Board.

More Convenience

Since MCU retains the servicing of your loan, it's easy to make your loan payment and check your balance. Using MCU@Home, you can make your payments and check your balance 24/7 or, if you prefer, your payment can be automatically deducted from any share account — whether it's at MCU or at another financial institution in the United States.