Key Components to Most Adjustable Rate Mortgages

1. Index rate

The rate to which the interest rate on an adjustable rate loan is tied. One of the more popular indexes used is the 1-year U.S. Treasury bill.

2. Margin

The amount added to the index rate that represents the lender’s cost of doing business.

3. Interest Rate Cap Per Adjustment

The maximum amount a borrower's interest rate may increase or decrease at time of adjustment.

4. Life Cap

This is the ceiling that the note rate cannot exceed over the life of the loan.

5. Amortization

A period of time in which gradual repayment of debt occurs by means of systematic payments of principle and/or interest. At the end of the time period the balance is zero.

6. Others:

  • Convertibility Option
  • Pre-Payment Option
  • Payment Cap Option
  • Deferred Amortization