Index(s)
ARMs are simply short-term fixed rate mortgages. The longer the fixed rate period, the higher the interest rate you'll pay for that period. For example, a one-year ARM generally has a higher interest rate than does a six-month ARM. A true 3-year ARM, where the rate adjusts every three years, has a higher rate than does the one-year variety, and so on.
The starting rate for ARMs is usually priced at a discount from the "index + margin" formula; this "introductory rate" (sometimes called a "teaser rate") is an incentive for you to take the loan. Real "teaser" ARMs, by definition, have a starting interest rate below that of the value of the index which governs the ARM, and are increasingly rare in today's very low rate environment.
The starting rate for ARMs is usually priced at a discount from the "index + margin" formula; this "introductory rate" (sometimes called a "teaser rate") is an incentive for you to take the loan. Real "teaser" ARMs, by definition, have a starting interest rate below that of the value of the index which governs the ARM, and are increasingly rare in today's very low rate environment.
CMT, COFI, and LIBOR indexes are the most frequently used. Approximately 80 percent of all the ARMs today are based on one of these indexes.Constant Maturity Treasury (CMT) Indexes: These indexes are the weekly or monthly average yields on U.S. Treasury securities adjusted to constant maturities.
Constant Maturity Treasuries is a set of "theoretical" securities based on the most recently auctioned "real" securities: 1-, 3-, 6-month bills, 2-, 3-, 5-, 10-, 30-year notes, and also the 'off-the-runs' in the 7- to 20-year maturity range. The Constant Maturity Treasury rates are also known as "Treasury Yield Curve Rates". Yields on Treasury securities at "constant maturity" are interpolated by the U.S. Treasury from the daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
The CMT indexes are volatile and move with the market. They reflect the state of the economy, and respond quickly to economic changes. These indexes react more slowly than the CD index, but more quickly than the COF index or the MTA index
Constant Maturity Treasuries is a set of "theoretical" securities based on the most recently auctioned "real" securities: 1-, 3-, 6-month bills, 2-, 3-, 5-, 10-, 30-year notes, and also the 'off-the-runs' in the 7- to 20-year maturity range. The Constant Maturity Treasury rates are also known as "Treasury Yield Curve Rates". Yields on Treasury securities at "constant maturity" are interpolated by the U.S. Treasury from the daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
The CMT indexes are volatile and move with the market. They reflect the state of the economy, and respond quickly to economic changes. These indexes react more slowly than the CD index, but more quickly than the COF index or the MTA index
11th District Cost of Funds Index (COFI):
11th District Cost of Funds Index FAQ + National Monthly Median Cost of Funds Index + Federal Cost of Funds Index
This index reflects the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada.
Since the largest part of the Cost Of Funds index is interest paid on savings accounts, this index lags market interest rates in both uptrend and downtrend movements. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general, which is good for you if rates are rising but not good for you if rates are falling.
11th District Cost of Funds Index FAQ + National Monthly Median Cost of Funds Index + Federal Cost of Funds Index
This index reflects the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada.
Since the largest part of the Cost Of Funds index is interest paid on savings accounts, this index lags market interest rates in both uptrend and downtrend movements. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general, which is good for you if rates are rising but not good for you if rates are falling.
London Inter Bank Offering Rates (LIBOR):
London Inter Bank Offering Rate (LIBOR) is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International financial market. London is the center of the Euromarket in terms of volume.
The LIBOR is an international index which follows the world economic condition. It allows international investors to match their cost of lending to their cost of funds. The LIBOR compares most closely to the 1-Year CMT index and is more open to quick and wide fluctuations than the COFI rate, as shown on our graph.
There are several different LIBOR rates widely used as ARM indexes: 1-, 3-, 6-Month, and 1-Year LIBOR. The 6-Month LIBOR is the most common.
London Inter Bank Offering Rate (LIBOR) is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International financial market. London is the center of the Euromarket in terms of volume.
The LIBOR is an international index which follows the world economic condition. It allows international investors to match their cost of lending to their cost of funds. The LIBOR compares most closely to the 1-Year CMT index and is more open to quick and wide fluctuations than the COFI rate, as shown on our graph.
There are several different LIBOR rates widely used as ARM indexes: 1-, 3-, 6-Month, and 1-Year LIBOR. The 6-Month LIBOR is the most common.
There are also several other varieties of indexes, including those generated using a so-called 'moving average' of a number of weekly or monthly values, and those contrived by (and available from) only specific lenders.
When the ARM rate is adjusted, the lender (or servicer) finds the value of the Index, and adds a markup, known as a Margin. Generally, the total of your index plus margin equals the interest rate you'll be charged for the next fixed period, however long that may be.
When the ARM rate is adjusted, the lender (or servicer) finds the value of the Index, and adds a markup, known as a Margin. Generally, the total of your index plus margin equals the interest rate you'll be charged for the next fixed period, however long that may be.
