QandAs: Loans

What do mortgage lenders look for when calculating adjustable rate mortgage rates?

Answer:
If you’re looking for a way to afford your dream

home, an adjustable rate mortgage may be the solution. Adjustable rate mortgages differ from fixed rate loans. With an adjustable rate, you’ll normally receive a lower interest rate on the mortgage, which can increase affordability.

Depending on the type of ARM chosen, you’ll also enjoy a fixed rate for the first three, five, seven, or ten years. Since the rate on an ARM fluctuates annually, these loans are risky. Each adjustment can result in an interest rate reduction or increase.

Several factors contribute to the rate on an adjustable mortgage. Similarly, mortgage lenders take into account varying factors when determining a rate. Although ARM’s traditionally carry lower rates than fixed rate mortgages, this provision is conditional. A borrower’s credit score impacts their rate on an adjustable mortgage.

If you have bad credit, don’t expect a good deal on the mortgage. True, the mortgage interest rate may be less when compared to a fixed rate loan. However, you’ll pay considerably more than a person with good credit. Moreover, adjustable rate mortgages are based on an index, which is selected by the lender. Interest rates increase as the index moves up and vice versa.


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