ARM Indexes
March 21st, 2007ARM loans, or Adjustable Rate Mortgages almost all have a feature which can greatly affect how much your monthly mortgage payment or mortgage rate may increase after the introductory fixed rate period of your loan expires, called the Index.
An ARM’s Index is really just a guide that allows different lenders to measure and compare changes in interest rates to determine the basic cost of the money they are lending you.
A major increase in the value of an index from the time you purchased the home or last refinanced can cause a significant increase in your mortgage payment, because the ARM’s index can be considered an underlying rate which affects, along with the margin, the final note rate which you are charged when your ARM loan begins adjusting at the en of its fixed introductory period. It just so happens that the major indices used to calculate the rates of ARM loans are currently at 3 year highs, which means that borrowers who are in very low rate adjustable ARMs are at the highest risk of experiencing a huge increase in the mortgage payments on their adjustable rate ARM loans.
Many of these borrowers are seeking to refinance their ARM loans to secure fixed rate mortgages, and solid options are available still available in this arena, however these options are becoming fewer and further between each day as the standards of the lending industry tighten in response to higher interest rates anticipated on the horizon. It may be advisable for homeowners in ARM loans to evaluate their risks and the options they may have to refinance and convert their adjustable rate mortgage to a fixed rate today, before their rates adjust over the next few years, and before credit standards remove the option of easily refinancing.
Lenders and investors in Adjustable Rate Mortgages utilize a variety of indexes for ARM mortgages, including the performance, return or yield of 1 month, 1 year, 3 year, 5 year and even 10 year US Treasury securities (10 year note yield indices are rarely used in adjustable rate ARM loans and are more commonly used to set the rate of 30 year fixed rate mortgages)
Popular ARM Indexes commonly used as adjustable rate mortgage benchmarks include:
>> Prime Rate (Bank Prime Loan)
>> MTA or MAT (12-Month Treasury Average)
>> CMT or TCM (Constant Maturity Treasury)
>> COFI (11th District Cost of Funds Index)
>> LIBOR (London Inter Bank Offering Rates)
>> T-Bill (Treasury Bill)
>> COSI (Cost of Savings Index)
>> CODI (Certificate of Deposit Index)
>> CD (Certificates of Deposit Indices)
Other indexes which may occasionally be used in Adjustable Rate ARM mortgages are highly varied, however homeowners may have an ARM mortgage with an index from the following list (although more rarely than those ARM indexes mentioned above):
>> Cost of Funds component indices:
- Federal Cost of Funds Index
- Semi-annual National Average Cost of Funds Index
- Quarterly Average Cost of Funds
- National Monthly Median Cost of Funds Index
- OR -
- RNY (Fannie Mae or Freddie Mac Required Net Yield)
- Semiannual Weighted Average Cost of Funds Index
- National Average Contract Mortgage Rate