Adjustable Mortgage Rates and the Fed


What happens if I have an ARM and my interest rate is higher than what the Fed rate is currently at? Will my mortgage payment go up or down?


The interest rate on your adjustable rate mortgage has nothing to do — at least not directly — with the “Fed Rate.”

When your adjustable rate mortgage adjusts, the new rate is determined by the index and the margin, both of which can be found in your mortgage note. The index is usually a published interest rate like LIBOR, the 1-Year Treasury rate, the MTA or the prime rate. The margin is a number, determined by the lender in accordance with the program guidelines for your mortgage, which gets added to the margin to determine the rate. So, if your mortgage note says that the rate is set according to LIBOR plus a margin of 2.5 and LIBOR at the time is 3%, your rate would be 5.5%.

Adjustable rate mortgages are also subject to rate caps, which means that the rate cannot go up more than a given amount on the adjustment dates and that it cannot go up more than a given amount over the life of the loan. You can read a more detailed explanation of rate caps that I wrote by going here.

I would suggest that if you think your rate might be going up you seek out the advice of a knowledgeable lending professional who can help you determine the best options for you. Be sure to bring a copy of your mortgage note so that your mortgage professional caan explain it to you in detail.

Answered almost 9 years ago
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