Adjustable rate mortgage

Adjustable rate mortgage refers to the mortgage loan which has got the facility to adjust the interest rate of the loan periodically according to an index. It is also called as variable rate mortgage. So the interest rate paid by the borrower also changes from time to time. In this mortgage, with the virtue of adjustable rates, risk is shouldered by the borrower also. Since the interest rates are unpredictable, the borrower is at advantage if the interest rate falls and loses if it rises. So the interest rate is basically determined by a index.

There are three ways for the application of index. First and foremost is application of the index directly. The interest rate in the promissory note changes exactly according to the index and equals it. Generally, the contract rate index is applied directly. According to the second method, the index is applied on a rate plus margin basis. In this method the index will equal the underlying index plus margin. The final way involves application of index based on a movement. In this way, the initial rate is not tied to any index only the adjustments are tied to it.

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