Understand all the parts of the modern adjustable rate mortgage.
Parts of the Modern Adjustable Rate Mortgage
- Life Cap: This is the ceiling that the note rate cannot exceed over the life of the loan.
- 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 One Year U.S. Treasury bill.
- Points and Costs: The amount of money they will charge you or add to the loan amount. This is really just a way to increase the yield to the lending institution.
- 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.
- Convertibility Option: An option that allows you to convert to a pre-determined or market-fixed rate at a specified time.
- Pre-Payment Option: An option to pre-pay any portion or a pre-determined portion of the principal prior to its due date without penalty.
- Deferred Amortization: Increasing principal balances derived from the underpayment of interest.
- Payment Cap Option: The capping of a payment amount when interest rates have increased that it raises the payment amount above a pre-determined limit.
- Margin: The amount added to the index rate that represents the lender’s cost of doing business.
- Interest Rate Cap per Adjustment: The maximum amount a borrower’s interest rate may increase or decrease at time of adjustment.