adjustable-rate mortgage help?

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I’m having trouble understanding what the calculation for this is & my textbook is kinda confusing, can someone explain how I would calculate this please?

Shawn bought a home with an adjustable-rate mortgage. The margin on the loan is 2.7%, and the rate cap is 7.2% over the life of the loan. If the current index rate is 4.3%, what is the initial interest rate of the ARM?


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  1. Reply
    Fugee M
    May 18, 2011 at 3:10 am

    the initial interest rate is 7%.

    The margin loan is the banks return rate to people who invest in them or has a account in there bank. 2.7% is the return rate for there customers. This amount is locked or fixed.

    The Rate cap is also known as life cap, 7.2 % means over the life of the ARM no matter what the interest rate cannot exceed over 7.2 % for the customer. Meaning that’s the highest the interest rate would go up to during the option arm life (margin + index).

    The index is the banks profit. This number can go up or down month 2 month depending on how the bank is doing and how much they charge. 4.3 % means that amount is what the bank takes in as profit.

    you plus the margin with index and you get your interest rate.

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