The “Qualifying Rate” in regards to a home mortgage is the minimum interest rate that a borrower must be able to afford to qualify for a mortgage. The qualifying rate is typically higher than the actual interest rate of the mortgage, and is used by lenders to assess whether the borrower can make their mortgage payments in the event of a future interest rate increase.
By using the qualifying rate, lenders can help ensure that borrowers can still make their mortgage payments even if interest rates rise in the future. This can help reduce the risk of defaults and foreclosures, which can be costly for both borrowers and lenders.
In the context of an Adjustable Rate Mortgage (ARM), the qualifying rate is the minimum interest rate that a borrower must be able to afford to qualify for the mortgage, even if the actual interest rate of the mortgage were to increase in the future.
In other words, if you’re applying for an ARM, your lender will use a qualifying rate to assess your ability to make mortgage payments in the future, even if the interest rate on your mortgage were to increase.
For example, let’s say you’re applying for a 5/1 ARM, which means that the interest rate is fixed for the first five years, and then adjusts annually thereafter. The lender may use a qualifying rate that is higher than the initial interest rate to ensure that you can still make your mortgage payments if the interest rate were to rise in the future.
Using a higher qualifying rate for an ARM can help reduce the risk of default and foreclosure, which can benefit both the borrower and the lender. However, it’s important to keep in mind that even with a qualifying rate, an ARM can be a riskier type of mortgage than a fixed-rate mortgage because the interest rate can adjust over time.
