Interest rate
The rate charged the borrower each period for the loan of money, by custom
quoted on an annual basis. A rate of 6%, for example, means a rate of 1/2%
per month. A mortgage interest rate is a rate on a loan secured by a specific
property. See Mortgage Interest Rates.
Interest rate
adjustment period
The frequency of rate adjustments on an ARM after the initial rate period is
over. The rate adjustment period is sometimes but not always the same as the
initial rate period. As an example, a 3/3 ARM is one in which both periods
are 3 years while a 3/1 ARM has an initial rate period of 3 years after which
the rate adjusts every year. See Information to Evaluate an Adjustable Rate
Mortgage.
Interest rate
ceiling
The highest interest rate possible under an ARM contract; same as "lifetime
cap." It is often expressed as a specified number of percentage points
above the initial interest rate. See Information to Evaluate an Adjustable
Rate Mortgage.
Interest rate
floor
The lowest interest rate possible under an ARM contract. Floors are less common
than ceilings. See Information to Evaluate an Adjustable Rate
Mortgage.
Interest rate
increase cap
The maximum allowable increase in the interest rate on an ARM each time the
rate is adjusted. It is usually 1 or 2 percentage points, but may be 5 points
if the initial rate period is 5 years or longer. See Information to Evaluate
an Adjustable Rate Mortgage.
Interest rate
decrease cap
The maximum allowable decrease in the interest rate on an ARM each time the
rate is adjusted. It is usually 1 or 2 percentage points. See Information to
Evaluate an Adjustable Rate Mortgage.
Interest rate
index
The specific interest rate series to which the interest rate on an ARM is tied,
such as "Treasury Constant Maturities, 1-Year," or "Eleventh
District Cost of Funds." All the indices are published regularly in readily
available sources. For a listing and discussion of various indices, see Adjustable
Rate Mortgage Indexes and Which Adjustable Rate Mortgage Index Is the Best?