In: Economics
10. What two factors determine the interest rate for an ARM? How might this differ from the initial rate? Why are the factors of rate caps and adjustment intervals important?
ADJUSTABLE RATE MORTGAGE
Meaning :
It's a variable rate of mortgage or tracker mortgage wherein the interest rate on the periodically adjusted based on an index which tells about the cost to the lender of borrowing on the credit market ,loan can be given at lender's standard variable rate
Two factors to determine ARM :
Difference from initial rate of interest :
Where for the initial rate of interest ,it is that rate of interest that is set when you take out the loan and will not change and unlike ARM ,the initial rate of interest will stay same for months,one year,or few years.Further it is often known as teaser rate as on adjustable or floating rate of loan ,it is often lower than ARM interest rate
Importance of rate caps and adjustment intervals:
CONCLUSION :
ARM rate is generally higher than that of initial wherein it is changing rate unlike initial .
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