The floor rate is the lowest rate that is allowed on an adjustable rate mortgage. Most borrowers understand that an ARM can increase, but depending on the type of loan they can also decrease to match market changes. The floor rate is the lowest rate that an ARM can adjust down to.The initial interest rate on a subprime adjustable rate mortgage usually is the floor rate. When the fixed rate period on these mortgages end the rate can increase, but they usually do not decrease.
Many Brokers and Loan Officers do not disclose the floor rate in the Truth in Lending Disclosure, because it is not required by law.
A Floor rate can also refer to the lowest rate available on any given loan program, fixed or adjustable. This means that the lender is unable or unwilling to write a loan lower than this "floor rate" even if the borrower is willing to pay to buy it down.
If you obtain an adjustable rate mortgage and the rate does not go up or down after the initial fixed period, do not assume that the loan is simply a fixed rate mortgage as the floor rate and an index that is lower then when you originally financed may be the reason for the rate staying the same.
