Adjustable rate mortgages mean the interest rate can be adjusted as the lender's cost to borrow money increases. This ensures the lender will receive a steady profit margin from the loan.When your sister pays her mortgage, there are two components she pays: Principle and Interest. Principle is the actual part of the loan and the interest is the cost of that loan that is payed to the lender.When the lender's interest rate that it pays to borrow money or pay depositors increases, the bank will increase the interest rate on the loan accordingly. There are several indexes the bank may use to peg the interest rate.The reason why the bank does this is so the customer bears some of what we call in finance/economics interest rate risk.
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