- An ARM rate can be based on one of several interest rate indexes.silver bevel symbol percentage image by PaulPaladin from Fotolia.com
A mortgage can have a fixed rate, meaning the rate will remain the same for the entire term of the loan, or an adjustable rate, meaning the interest rate will reset at regular intervals, usually annually. Fixed mortgage rates are not tied to a specific index, but reflect market interest rates for comparable debt securities at the time of the loan origination. Adjustable-rate mortgages have an annual interest rate tied to a specific interest rate index. An adjustable-rate mortgage will be written to reset on the anniversary date at a specific rate index plus a margin rate. - One common index for adjustable-rate mortgages is the one-year constant maturity Treasury, or CMT. The constant maturity Treasury index tracks the daily changes in the rate of the one-year Treasury bill. The rate is also known as the Treasury yield curve rate and it is updated and published by the U.S. Treasury. Treasury securities are the most widely traded debt securities, and the rate of the one-year CMT will quickly reflect the changes in short-term interest rates. For example, all ARMs written through the VA mortgage program must be indexed to the one-year CMT. In the first week of October 2010, the CMT rate was at 0.23 percent.
- The 11th District Cost of Funds Index, or COFI, is based on the rates paid by banks on savings accounts in the western U.S. The COFI index is the slowest-moving index to reflect changes in interest rates. In a declining interest rate environment, homeowners with an ARM based on the COFI will have the rate resets decline at a slower rate than with other ARM rate indexes. In a rising rate environment, the COFI will lag the other index rates and the rate adjustments for ARMs based on the COFI will not increase as fast as with other indexes. In the first week of October 2010, the 11th District Cost of Funds Index was at 1.713 percent
- The different maturities of the London Interbank Rate, or LIBOR, reflect the short-term rates used by the banks in Great Britain and the U.S. Federal Reserve federal funds rate. LIBOR is an international rate for dollar based deposits. Adjustable-rate mortgages may use the 6-month or one-year LIBOR as an index rate. The Federal Reserve Board ARM handbook lists the one-year LIBOR as a common index and the Mortgage-X mortgage information service website states that the 6-month LIBOR is the most commonly used LIBOR maturity for adjustable rate mortgages. In October 2010 the 6-month and one-year LIBOR rates were at 0.46 and 0.78 percent, respectively.
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