Definition of Adjustable Interest Rates

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Adjustable interest rate loans usually have a cap that is the maximum that a mortgage can go up over the life of the mortgage. Find out how an adjustable rate loan can start at a fixed rate with help from a financial specialist in this free video on interest rates and loans.

Part of the Video Series: Interest Rates
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Video Transcript

Hi, this is Matt McKillen with Innovative Financial Group. A question posed to me today is, What's the definition of an adjustable rate loan? There's two types of mortgages obviously. There's the fixed rate product which is very simple. You're given a note rate on day one and the rate will remain the same throughout the term of the mortgage. Adjustable rate loans on the other hand are a bit more complicated. Sometimes they give you a lower start rate to begin with and an adjustable rate loan can even be having a fixed rate for the first two, three, five years of the mortgage. Then what happens is after that agreed rate of time the loan can then adjust, and the adjustment is based on whatever index is determined by that loan. One of the more popular indexes is the six month Libor. Another one is called the One Year Treasury. So what happens is, is that for the remainder of the life of that mortgage, whatever that index is doing during a time of reset, your rate can change. Usually what happens on an adjustable rate loan is that you're given a cap, which means that the maximum that your mortgage can go up over the life of the mortgage is maybe five or six percent. With rates as competitive as they are right now on the fixed rate loans, really I don't see any reason why anyone would want to get in to an adjustable rate mortgage at this time. As a matter of fact we're spending a lot of time getting people out of them. Again, my name is Matt McKillen. I'm with Innovative Financial Group.

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