Professional Loans Blog

I know there a number of consumers with adjustable rate loans who have not idea what they have. In this article I will explain the basic way an adjustable loan works in hopes it will help them better understand what type of loan they have and if they need to refinance.

There are 5 important parts to every adjustable rate mortgage. They are the Start Rate, The Index, The Margin, The payment or interest rate caps, and the lifetime maximum. In all adjustable rate loans the Index + Margin = Your Interest Rate. A simple A + B = C algebra equation. The margin is the constant in the equation and the most important part of the adjustable loan.

If you have an interest rate cap your loan would only increase the maximum that cap allows in the note, even if the formula says it should be higher. This applies to each adjustment and also would include the maximum lifetime adjustment. Normally these loans adjust at the end of a fixed period i.e. 1, 3, 5, 7, or 10 years. After the fixed period they would then adjust annually or semi annual or monthly.

If you have a payment cap on your loan it will have negative amortization. Because the payment on the loan has a limit, the interest rate can be higher than your minimum payment requirement and the loan balance will increase if you make the minimum payment. These loans are the ones that are advertised with the Low starting interest rate, i. e. 1%, 2% etc.

If you are looking for some honest answers in understanding what an adjustable loan is and how it works, visit my website www.rumblefinancial.com or call Lee Rumble 760-737-0850