Click for FREE Florida Mortgage Loan Quotes
- takes less than 30 seconds!
Florida Mortgage 360 Copyright 2006 :: About Us :: Site Map :: Privacy Policy :: Contact Us :: Links
Calculating the interest rate on a Florida Adjustable Rate Mortgage (ARM or pay option ARM) is a little bit more involved than the interest rate calculations that you may be used to with a traditional Florida mortgage program. The calculations are not complex by any stretch of the imagination. It’s just a simple matter of understanding how they are configured. (However, do not assume that all Adjustable Rate Mortgages are exactly the same as some lenders may have certain options on one program versus another that could make a significant difference in the long run). Let’s learn how these popular FL mortgage loans work!
One of the more distinguishing characteristics of an ARM is that there are two distinct phases in the payment schedule. The first phase is typically a fixed interest rate – exactly like a traditional 15 year or 30 year mortgage program. However, while in the traditional fixed rate mortgage the interest rate is fixed for the whole term in the FL adjustable rate mortgage the interest rate is fixed only for the first phase. This first phase in an ARM can last anywhere from 1 month to 10 years.
During the second phase of the ARM the interest rate can change. The rate during the second phase is usually tied to some type of index and then a margin percentage that is stated in the terms of the loan. Generally speaking, the adjustment rule will equal the most recent value of a specified interest rate index, plus a margin. For example, if the index is 6% when phase one ends, and the margin in the terms of the loan is 1.75% then the new rate for the second phase (until the next adjustment) will be 7.75%.
However, there are two conditions that must be met when calculating the interest rate for this general phase two rule. The first condition is that the new interest rate increase must not exceed any rate adjustment cap stated in the initial terms of the loan contract. This protects the Florida consumer from a huge jump in the interest rate and subsequently the payments. The second condition is that the new rate must not exceed the total maximum rate stated in the contract. This again is to protect the consumer.
During the second phase of the Florida adjustable rate mortgage the interest rate can be adjusted periodically. Have you ever wondered what the numbers really mean when you see interest rates for 5/1 ARM’s, 7/1 ARM’s, 3/1 ARM’s and the like? Well, now you will find out: the first number indicates how many years phase one will last for and the second number indicates how often you can expect an interest rate adjustment. For example, if you purchase a FL ARM and the terms are 7/1 with a 6% initial rate then you will have a 6% interest rate for the first 7 years of the payment schedule. If in year 8 the index rate is 5% and the margin stated in the contract is 1.5% then in year 8 your interest rate will be 6.5%.
Congratulations! You now know how to do some basic interest rate calculations for one of Florida’s more popular loan programs: the Adjustable Rate Mortgage. Compare mortgage rate quotes on ARM’s and traditional mortgages side by side from top FL lenders by requesting free Florida Mortgage Quotes!