Understanding how the lender calculates an adjustable rate mortgage (ARM) is important when considering a home loan. Lenders use various methods to calculate the amount of interest that’s paid by the homeowner. The method that the mortgage server uses can have a substantial impact on the future monthly payments. The interest rate on an ARM is calculated using an index and a margin.
The Adjustable Rate Mortgage Index
The index is one part that lenders use to figure the monthly interest mortgage payment on an ARM. There are several more common indexes that lenders use to calculate the interest payment. The more common indexes are the:
