How to Calculate Interest Rate From Index and Margin
Buying a home is a watershed moment and an established part of the American Dream. The process may plunge you into a morass of unfamiliar mortgage, banking and financial lingo. Dizzying though it may be at first, getting a grip on the types of mortgages and their attendant interest rate computations is a good idea. The adjustable rate mortgage (ARM) is one option available to home buyers. The interest rate on an adjustable rate mortgage is set according to the index and the margin the lender has chosen.
Other People Are Reading
Instructions
-
-
1
Find out which index rate the bank is using. According to the Federal Reserve, mortgage lenders use such indexes as the Cost of Funds Index (COFI), the London Interbank Offer Rate (LIBOR) or the one-year constant-maturity Treasury (CMT) securities.
-
2
Get the margin figure the bank intends to use. This figure is established by the bank, often based on the quality of your credit record. If you have excellent credit, the bank may assign a lower margin figure, as it feels it is carrying lower risk.
-
-
3
Add the index rate to the margin to arrive at the interest rate figure. For example, if the index rate is 5 percent and the margin is 2 percent, the interest rate is 7 percent.
-
1
Tips & Warnings
Be sure you understand what type of ARM you are getting. Some are structured to go up when the index rises and to drop when it falls. Others are based on the average value of an index over a certain period of time. In any case, do your research on the history of the index your lender is using to help better evaluate potential risks.
