Adjustable Rate Mortgage

Adjustable Rate Mortgage involves a repayment mode where the borrower is subject to variations in the amount of money he has to pay to the lender. This is because in Adjustable Rate Mortgage the interest rate that is charged on the loaned amount is not fixed and is subject to variations that result from changes in the money market. It must be noted though that, the borrower is protected from drastic changes in the interest rate by a maximum interest rate limit called ‘Ceiling’.

Adjustable Rate Mortgage has been defined variously depending on the way it has evolved over the years. However an optimum definition would be to quote www.nolo.com which says that it is “a mortgage loan with an interest rate that fluctuates in accordance with a designated market indicator – such as the weekly average of one-year US treasury Bills – over the life of the loan.

The term Adjustable Rate Mortgage is essentially used in countries like the United States and Britain whereas in India it is better known as the ‘floating rate’, which means the same thing with minor situational variations.

For a borrower it is rather difficult to fully understand what an Adjustable Rate Mortgage is or for that matter how it impacts his repayment. A number of aspects have to be considered, for instance, indexes, margins, caps on interest rates, caps on interest payments, negative amortizations, payment options and recalculation of the loan amount. Adjustable Rate Mortgage packages are not standard at all and are heavily customized to suit select borrower preferences. The lender on the other hand has to consider the competitiveness of the market and design his package.

Some of the leading companies that deal in Adjustable Rate Mortgage are:

Pulte Homes
Lloyds Finance
Cheltenham & Gloucester
Hong Kong and Shanghai Banking Corporation
ICICI Home Loans
HDFC
LIC Home Finance


Over a period of time Adjustable Rate Mortgage has evolved into various customized versions in accordance with the consumer preferences and existing market realities.

For instance an Adjustable Rate Mortgage could be designed in such a way that it remains in fixed interest mode for a certain length of time and then become adjustable for the remaining period of the mortgage. This variant of the Adjustable Rate Mortgage is also known as Hybrid Adjustable Rate Mortgage. Yet another version is where the borrower has the option to choose between paying just the interest for the period of the mortgage and pay the principal amount at the very end or agree to pay a specified mutually agreed amount throughout the term of the mortgage.