how the variable rate on arms is determined
at the end of the initial fixed rate period arm interest rates will become variable adjustable and will fluctuate based on some reference interest rate the arm index plus a set amount of interest above that index rate the arm margin the arm index is often a benchmark rate such as the prime rate the libor the secured overnight financing rate sofr or the rate on short term u s treasuries 56although the index rate can change the margin stays the same for example if the index is 5 and the margin is 2 the interest rate on the mortgage adjusts to 7 however if the index is at only 2 the next time that the interest rate adjusts the rate falls to 4 based on the loan s 2 margin 6the interest rate on arms is determined by a fluctuating benchmark rate that usually reflects the general state of the economy and an additional fixed margin charged by the lender 6adjustable rate mortgage vs fixed interest mortgageunlike arms traditional or fixed rate mortgages carry the same interest rate for the life of the loan which might be 10 20 30 or more years they generally have higher interest rates at the outset than arms which can make arms more attractive and affordable at least in the short term however fixed rate loans provide the assurance that the borrower s rate will never shoot up to a point where loan payments may become unmanageable with a fixed rate mortgage monthly payments remain the same although the amounts that go to pay interest or principal will change over time according to the loan s amortization schedule if interest rates in general fall then homeowners with fixed rate mortgages can refinance paying off their old loan with one at a new lower rate lenders are required to put in writing all terms and conditions relating to the arm in which you re interested that includes information about the index and margin how your rate will be calculated and how often it can be changed whether there are any caps in place the maximum amount that you may have to pay and other important considerations such as negative amortization 7