Loan Index Floor

When a mortgage has an indexed rate instead of a fixed rate it is known as an adjustable rate mortgage.

Loan index floor.

This booklet applies to the occ s supervision of national banks and federal savings associations. Lenders use an underwriting floor to establish minimum guidelines for borrower creditworthiness and to determine the size of loan for which the borrower is qualified. So lenders have gone from just saying the floor on a deal is the index less a certain amount of basis points to naming a specific rate notes franzetti. The index and margin are added together to become your interest rate when your initial rate expires.

For an adjustable rate mortgage the index is a benchmark interest rate that reflects general market conditions and the margin is a number set by your lender when you apply for your loan. An adjustable rate mortgage can be beneficial or detrimental. Compare the rate you calculated after applying your adjustment cap to your loan s floor rate which is the lifetime lowest rate that the loan can go to and choose the highest one. Rate decline favors fixed rate loans.

An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product. Floors in lending. Indexed rates on mortgages. An interest rate cap is a derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price an example of a cap would be an agreement to receive a payment for each month the libor rate exceeds 2 5.

An arm index is a base interest rate used to compute adjustable rate mortgage interest for some time period. For instance if your loan s floor is 3 75 percent but your fully indexed rate is 3 63 percent your loan rate will actually be 3 75 percent. This booklet addresses the risks associated with floor plan lending and discusses risk management practices for floor plan lending. Interest rate floors are utilized in derivative.