How do adjustable-rate mortgages work?
Answer There are many types of adjustable-rate mortgages, but there are common features among them. One common feature of adjustable-rate mortgages is an interest rate change that occurs after a stipulated number of payments have been made. The interest rate can increase or decrease depending on how the new interest rate is calculated. Typically, the interest rate change is based on a predetermined index value such as the treasury bill rate, prime, the cost of funds from the Federal Home Loan Bank or the lender’s internal cost of funds plus a margin. If a mortgagor currently has an interest rate that is pending adjustment, the new rate would be calculated by adding the current index rate and a margin. For example, if the mortgagor’s current rate is 6.00% plus a 2.00% margin, the new rate would be 8.00%. The maximum amount the interest rate can change during any adjustment period is usually fixed. This maximum adjustment is called the cap. Adjustable rate mortgages also have a lifetime
There are many types of adjustable-rate mortgages, but all have some common features. One common feature of adjustable-rate mortgages is an interest rate change that occurs after a stipulated number of payments have been made. The interest rate can increase or decrease depending on the market rate (index). Typically, the interest rate change is based on a predetermined index value and a margin. If a customer currently has an interest rate that is pending adjustment, the new rate would be calculated by adding the current index rate and a margin. For example, if the customers current rate was 6.000% with a 2.000% margin, the new rate would be determined by adding the current index rate (for example, 5.000%) to the margin. In this example, the new interest rate would be 7.000%. The maximum amount the interest rate can change during any adjustment period is usually fixed. This maximum adjustment is called the annual rate cap. Adjustable-rate mortgages also have a lifetime rate cap, prevent
