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Adjustable rate mortgage interest rates are set on a periodic basis. Depending on your mortgage contract, your rate may adjust only once a year, or adjust frequently.
Conditions Imposed by the Contract
Some contracts set the adjustable amount of interest prior to closing. Rates can be capped at a certain level over prime, or they can be adjusted as a percentage based on index and margin. The base rate on an adjustable mortgage is called the "index." It can be based on items such as the prime rate or initial interest rate. The percentage above this rate is called the "margin," and it tends to remain constant.
Payment History on the Mortgage
With an adjustable rate mortgage, it is essential to make all interest payments in full and one time. Poor performance on your mortgage could result in a higher rate. This is particularly risky if you have a rate that resets each quarter. Your rate could climb several points in just one year if you miss payments or do not pay the full amount required.
Credit Score
If your credit drops due to factors outside your mortgage, your adjustable rate could climb. For example, if you take another large loan, your credit score may go down, and your mortgage rates may go up. This can lead to a dangerous amount of debt payments each month.
