When your variable-rate, or adjustable-rate, loan reprices, you might celebrate or you might need to tighten your budget. A repricing occurs when the interest rate adjusts on a variable-rate loan, such as a mortgage or business loan. Your monthly payment rises and falls with your rate. Adjustable-rate loans reprice periodically, such as every 6 months or every year. If your rate changes, you pay a new monthly amount, for better or worse, until the next repricing. You can calculate your new rate and payment when your loan reprices to figure out what you’re in for.
Find, on your most recent billing statement, your adjustable-rate loan’s principal balance, which is the amount you currently owe. For example, assume you have an adjustable-rate mortgage with a $280,000 principal balance.
Multiply the number of years of the original loan term by 12. Subtract the number of months for which you have already paid to determine the number of months remaining on your loan. In this example, assume your original loan term was 30 years and you have already paid for 12 months. Multiply 30 by 12 to get 360. Subtract 12 from 360 to get 348 months remaining.
Find in your original loan documents your loan’s margin and index. An index is a fluctuating benchmark interest rate, such as the London Interbank Offered Rate, that banks use to set other rates. A margin is a fixed percentage your lender adds to the index to determine your interest rate. In this example, assume your loan’s margin is 2 percent and the index is the three-month LIBOR.
Look up the current index rate on any financial website that publishes interest rates. In this example, assume the three-month LIBOR is currently 3 percent.
Add your margin to the current index rate to calculate your new annual interest rate after the loan repricing. Divide the annual rate by 12 to convert it to a monthly rate. In this example, add 2 percent to 3 percent to get a 5 percent annual interest rate after the repricing. Divide 5 percent, or 0.05, by 12 to get a 0.00417 monthly rate.
Substitute the values into the loan payment formula: P[R / (1 - (1 / ((1 + R)^N)))]. In the formula, P represents the principle balance, R represents the monthly interest rate and N represents the number of months remaining on the loan. Continuing with the example, substitute the values to get $280,000[0.00417 / (1 - (1 / ((1 + 0.00417)^348)))].
Calculate the numbers in parentheses. In this example, add 1 to 0.00417 to get 1.00417. Raise 1.00417 to the exponent of 348 to get 4.255. Divide 1 by 4.255 to get 0.235. Subtract 0.235 from 1 to get 0.765. This leaves $280,000(0.00417 / 0.765).
Divide the numbers in parentheses. Multiply the result by the principal to determine your new monthly payment after the repricing. In this example, divide 0.00417 by 0.765 to get 0.00545. Multiply $280,000 by 0.00545 to get a $1,526 monthly payment after the repricing.
Items you will need
- Recent loan billing statement
- Original loan documents