Top > Business > 2006 > August > 2006-08-20

Some Facts About Mortgage Rate Percentages

Adjustable Rate Mortgage interest rates are made up of two things ? the Index value (the portion that fluctuates) and the fixed Margin. Combined they equal the interest rate charged on your loan. The Index (Treasury-based, LIBOR, COFI, COSI, etc.) can fluctuate monthly, semi-annually or annually depending on the product. Therefore, the interest rate you are paying may go up, down or stay the same with every index adjustment. The margin is fixed for the life of the loan.

Common program names are Option ARM, Pick-A-Payment Loan, Flexible Payment Loan, Negative Amortization Loan, Monthly Adjustable, as well as others. There are as many variances of the same loan type as there are lenders offering them. Some monthly adjustable loans will begin with a "fixed" interest rate as low as 1%. That rate, however, may be good for as little as one month. The "fully-indexed" interest rate would then be charged from month two forward.

There is good news. When a borrower understands the financial benefits and the best monthly adjustable/lender combination is selected, there is little concern about a recast period or unaffordable monthly payments in the future. For example, a lender offering a 2.4% minimum payment, 10 year recast period, with a 6% fully-indexed rate increasing .5% each year for the next 3 years would not reach the maximum deferred interest point.