How Adjustable Mortgage Rates Work

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What is the formula for adjustable interest rate?


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There is no specific formula for your interest rate adjusting if you are past your lock period. There are however ‘ caps’ on the loan in which your interest rate must stay under. Your ARM loan is attached to an index, most likely the LIBOR or MTA. In either case, the amount of the adjustment depends soley on the American economy or England’s economy (for the LIBOR). With the low rates in the American economy today many people’s adjustable loans are actually getting lower.

To understand this phenomenon you have to understand how interest rates work. Every signle rate available whether they are student loans, car notes, mortgages etc. all work the same. The equation is Margin + Index = Rate. The margin is constant and is a bank’s profit. An index is always changing and is the bank’s cost of lending you money. We all know that bank’s don’t walk into their vault and grab $100,000+ for a home mortgage. They borrow money from the Fed and other sources. They borrow money at the indexed rate which changes month to month and charge you a margin (their profit). Once your ARM loan is past the locked period your loan will flucuate because the indexes flucuate ever sigle month much like the stock market.

Answered over 6 years ago

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