Can you explain to me in layman terms how...

[QueenBoudica]

...adjustable mortgage rates work? My sister has an adjustable rate mortgage. Over the past year her mortgage payments have gone up several times. Now her monthly mortgage payment is $2,235 for a 2000 sq ft home in a nice area. No new construction has gone up..so I dont understand...I was under the impression if you paid your bills on time your monthly payment would adjust down not up.My condo (2500 sq ft also in a very nice area) payments have gone down, but her payments keep rising..why?DJM: You hit on something that required a phone call to my sister. I pay $50 over my monthly payment while my sister simply pays the monthly payment... Great answers here. So far only one answer had me pulling out my hair because the person used a lot of jargon...

[NYC_Since_the_90s]

It has nothing to do with if you pay on time (well if you do not, they can raise your rates).But an adjustable rate mortgage changes to match the current rate that banks charge (not exactly correct, but trying to be simple). So if the rate you started at is 5% (because that is what the banks were charging), and the rates at the bank go up to 6%, then your mortgage will jump to 6%.It is NOT the banks just raising your rate. Their rate is matched to something else. That is just the way that it works.

[Jesse]

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.

[Avatar the last airbender]

Mortgage payments are influenced by the interest rate. With an adjustable rate you pay more or less depending on the market interest rate..if you have 100K mortgage and 5% interest your interest payment for the year is $5000. Divide this by 12 months ad you get a rough idea about the monthly payment ($416 p/m)Now if the rate jumps from 5% to 7%, the interest owed will be $7000 per year or $583 p/m.That means the mortgage payment goes up $167 per monthIf your sister got a ARM loan that expired she may have experienced a bigger jump in interest.I suggest that your sister reads the fine print of the load to find out what to expect. Many loans have a ceiling (wrt to the interest rate) or can only be increase by a certain percentage every year.Often Mortgage payments include Property taxes. If the local property taxes for up, your monthly mortgage payment goes up. In the third and fourth quarters many banks will increase your escrow payment (money that goes toward payment the property taxes) to compensate for this increase. To catch up on the tax increase you basically end up paying double taxes for the last two quarters, once to catch up on your property taxes, once to build up for the higher taxes which must be paid next year.

[djm369]

The Mortgageman explained it well. ARMS adjust to an index plus a margin after the designated fixed period, which is typically 3-5 years. I won't touch base on the caps. They will typically adjust every 6 months to a year. She should refinance into a fixed rate if she can find a good rate or sell. Her payments are going up because rates (the index) are going up. Your payment is going down because you probably have a fixed rate and are making payments that are reducing your principle, which lowers the amount of interest charged each payment period.