Calculation of Adjustable Rate Mortgages

As the name suggests, an adjustable rate mortgage (ARM) is a home loan whose interest rate can change over time. Unlike a fixed rate mortgage whose interest does not the change, an ARM's interest may go up or down depending on different market factors. Since the interest changes, this means that a borrower's monthly payments are also bound to change over the term of the loan. You can go to this website for more great tips!

If you are looking to apply for an adjustable rate mortgage, it is important to know how its interest rate is calculated. Some of the things you should know include the index, margin, and the "fully indexed" rate. Knowing these three factors will help you understand how your monthly ARM payments as well as the total payments over time will be affected. Read more great facts, click here .

How ARM Interest Rate is Calculated
As a prospective ARM loan borrower, there are two important terms you should understand. These terms are the index and margin. When combined, the two determine how the interest you are charged is calculated and applied. Let's find out what the two terms refer to.

a) The Index
The index refers to the general measurement of interest rates. There are a number of indexes that are commonly used in calculation of ARM loan. Some of the indexes are the Cost of Funds Index (COFI) and the 1-year constant-maturity Treasury (CMT) securities. There are high chances that one of these indexes will be applied on your ARM loan.

b) The Margin
The margin works like some sort of markup. The margin refers to an extra amount that lenders add on top of the index when calculating the interest of an ARM loan. Each lender determines the margin to charge for an ARM. One thing you should know is that the margin remains constant over the life of the loan.

What is the Fully Indexed Rate?
Calculating the interest of an ARM loan requires combining the index and the margin. When these two factors are combined, the resulting number is referred to as the "fully indexed rate". In layman's terms, this is the amount that is applied to your monthly payments.

As a borrower, the fully indexed rate is the most important number for you. The number will determine how much interest you will pay over time as well as the amount of monthly installments. However, it is still advisable to know where the number comes from and how it is arrived at. Kindly visit this website for more useful reference.