The new percentage of
interest that a housing loan or mortgagor must pay on the principal of an
adjustable rate (Floating) mortgage when the reset date arrives & the
prescheduled interest rate change goes into effect. It is also called Floating Rate or Adjustable rate
The mortgage contract
explains when the rate resets & how the new rate is calculated. When the rate
resets, the new interest rate may be higher or lower than the initial interest
rate depending on market conditions.
Investopedia explains
- Reset Rate..
Adjustable rate mortgages have a
fixed interest rate for an initial period that commonly ranges from one to five
(1 to 5) years. When this period ends, the interest rate is reset based on a
market rate of interest using a benchmark such as the rate of one-year Treasury
bonds or the London Interbank Offered Rate. In India it based on Reserve Bank of
India (RBI).
The lender adds an
additional percentage to that benchmark rate. The margin rate does not change,
but the market rate does.
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