Patricia has an adjustable rate mortgage (ARM) on her home in Syracuse with an annual interest rate that adjusts every year. Her current rate is 3.75% annually. If her rate increases to 4.25% at the next adjustment, what happens to her monthly interest calculation methodology?
Correct Answer
A) The new annual rate is divided by 12 to get the new monthly rate applied to the current balance
When an ARM adjusts, the new annual interest rate (4.25%) is divided by 12 to determine the new monthly interest rate (0.354%), which is then applied to the current outstanding principal balance. This is the standard methodology for interest rate adjustments in ARMs.
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