QandAs: Loans

What is an Adjustable-Rate Mortgage?

Answer:
All adjustable-rate mortgages feature five basic features.

The initial interest rate is the interest rate of the mortgage when initially signed. The adjustment period is the length of time that the interest remains stationary in between the rate changes.

The index rate ties the interest on the loan to a specific index. The margin is the amount added onto the interest rate given by the index. Finally, an interest rate cap applies a limit to how much the interest rate can change in one adjustment period, or over the entire lifetime of the loan. Other optional features include the option to switch the loan to a fixed-rate mortgage, discounts on the interest rate for the first year, or fees applied if the loan is paid off early.