If the Index is 2.5% one month and the Margin 2.25%, then your rate that month would equal 2.5 + 2.25 for a total of 4.75% for that given month. You will receive 3 payment options based upon this rate: a 30-year based payment, a 15-year based payment and an Interest-Only payment. On a 150k loan @ 4.75%, the payments:

Now if the MTA Index rises substantially and the Index becomes say 5%, then your monthly rate would be 5% + the same fixed 2.25% Margin for a total of 7.25%. On a 150k loan @ 7.25%, the payments:

So why choose this 1-month Adjustable Rate Mortgage instead of a traditional fixed-rate loan? Because this loan also offers the Minimum Payment option:

The MINIMUM PAYMENT
This 4th payment option simply allows you to make a smaller Out-of-Pocket Payment any month you desire at the expense of your Loan Balance.

What this means is that the loan rate will still and always be determined by the formula above, the Index plus the Margin, and the TRUE minimum amount owed will always be payment option #3, the Interest-Only payment. However, now you can opt for an even LOWER payment based on a fixed 1.375% rate. The catch is that the difference between the Minimum Payment and the Interest-Only payment gets ADDED to your outstanding loan balance.

On our 150k example above, the Interest-Only payment ranges from $594-906 depending upon the rate each month. The Minimum Payment however will always be $508 in this scenario. If you make only the $508 minimum payment, the difference, or anywhere from $86-$398 in this example, will be added to your loan's balance and thus reducing the equity in the property! Your cash flow will be maximized due to the extremely low payment but again your loan balance will rise – a 150k loan may become a 175k loan over time!

The Minimum Payment option essentially leverages your property's existing equity and future appreciation in order to clear the maximum cash flow today. As such, it is better suited as a Refinance loan for properties that have substantial equity(+/- 20%).