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How do I calculate the rate on my adjustable rate mortgage?

By Ann White

How do I calculate the rate on my adjustable rate mortgage?  Read here to find out how you can calculate your adjusted mortgage rate!

During the sub-prime lending era, many people chose to purchase homes and get adjustable rate mortgages.  Adjustable rate mortgages were ideal for many people because they came with very low interest rates for an initial period of time, which most frequently was 3 to 5 years.  Unfortunately, many of those initial periods are expiring and interest rates are adjusting.  For many people, there is a lot of confusion in how to calculate their new mortgage rate.  This article discusses information needed to calculate the new rate.

Interest Benchmark

When calculating the rate on an adjustable rate mortgage, the first piece of information needed is the interest benchmark.  This is normally a federal interest rate which fluctuates over time.  Depending on how the benchmark moves, the borrower’s adjusted interest rate will move.  The most common benchmarks are the federal treasury rate and LIBOR.

Interest Rate Spread

The second piece of information needed to calculate the rate on an adjustable rate mortgage is the spread.  The interest rate spread is normally defined in terms of a percentage and is what is used to determine the adjusted rate.  The adjusted rate is calculated by combining the spread and the benchmark.  For example if the spread is 2% and the benchmark is 4%, the adjustable rate will be 6%.

Ceiling and Floor

The last piece of information needed to calculate the rate on an adjustable rate mortgage is the rate ceiling and floor.  The interest rate ceiling and floor place a maximum and minimum level on what the interest rate can be after it is adjusted.  This protects both the borrower and lender in the event the benchmark rate fluctuates significantly.

Related posts:

1. How Do I Calculate My Payments On An Adjustable Rate Mortgage?
2. Does FHA Offer Adjustable Rate Mortgages?
3. What Is The Best Way To Calculate A Home Mortgage Refinance Rate?
4. How Will The Current Mortgage Rate Drop Affect My ARM Rate?
5. How Do I Calculate My Mortgage Taxes?