Have you ever wondered just how mortgage rates are determined for adjustable rate mortgages? In this post, we’ll go over the basics of how these rates are calculated. Adjustable rate mortgages offer flexibility and the possibility of having a lower rate, but they also carry a certain amount of risk, as the rates are subject to change. Before signing up for an adjustable rate mortgage – otherwise known as an ARM loan – be sure you read the following carefully, and speak with a trusted mortgage consultant for further information.
The first thing you should understand about ARM loan rates is that they are made up of two parts: the index and the margin. The index is a measure of the interest rate in general and the margin is essentially an extra amount that is added by the lender. If the index goes up, it will usually cause the interest rate to go up as well, resulting in a higher monthly payment. Likewise, if the index moves down, your payments could be lower. [Read more...]