Adjustable Rate Mortgage Components
To better understand an adjustable rate mortgage, you must have a working knowledge of its components. These components are:
A financial indicator that rises and falls, based primarily on the economy and changes in the marketplace. It is usually an indicator and is therefore the basis of all future interest adjustments on the loan. Mortgage lenders currently use a variety of indexes as you will find in our adjustable rate mortgage indexes section.
The margin is added to the index to determine the final interest rate when the loan has finished the fixed portion (1 to 10 years) and is in the adjustment phase.
The rate during the initial period of the adjustable rate mortgage in which the interest is fixed. This fixed period can range from 1 year to 10 years.
The actual interest rate charged for a particular loan program.
When the initial fixed period of 1 to 10 years has ended, the loan then enters the adjustment period where the loan will adjust on a scheduled basis, typically once a year.
Limit placed on the up-and-down movement of the interest rate, specified per period adjustment and lifetime adjustment (e.g. a cap of 2 and 6 means 2% interest increase maximum per adjustment with a 6% interest increase maximum over the life of the loan).
Occurs when a payment less than the interest due is made. The shortfall amount is added back onto the principal balance.
The option to change from an adjustable rate mortgage to a fixed-rate loan. A conversion fee may be charged.
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