What in the Heck is an ARM Index?

Adjustable rate mortgage indexes are used to calculate the new interest rate on ARMs. The index is a rate set by market forces and published by a neutral third party. There are a few acronyms to denote various ARM indexes, such as COFI, LIBOR, MAT and CMT. Each index responds at its own peculiar pace to the economy’s ups and downs. Indexes are divided into two broad categories: those based upon rate averages and those based upon spot rates. This is not written in stone and there is a lot of overlapping.

Most ARM rates are tied to the performance of one of three major indexes:

1. The most common index for ARM adjustments is the one-year U.S. Treasury bill. The one-year bill has a yield very near that offered by the 30-year Treasury bond, which is used to set rates on 30-year fixed mortgages. The weekly constant maturity yield on the one-year Treasury Bill. The yield debt securities issued by the U.S. Treasury are paying, as tracked by the Federal Reserve Board.

2. The 11th District Cost of Funds Index (COFI)
The interest financial institutions in the western U.S. are paying on deposits they hold. COFI are indexes based on average rates. The COFI-based loans are indexed to the cost of funds for the 11th district of the Federal Home Loan Bank system. The 11th district consists of banks based in the states of Arizona, California and Nevada, in the United States of America. The cost of funds index is a weighted average of the interest that member banks pay on money they borrow, mostly on customers’ checking and savings accounts.

3. The London Interbank Offered Rate (LIBOR)
The rate most international banks are charging each other on large loans. LIBOR is the most popular index based on spot rates.The LIBOR tracks the rates at which London banks pay to borrow one another’s reserves. It fluctuates more rapidly than the COFI.

There are several other indexes but for the most part these three are the major indexes that most ARM’s are based on. There are a few other indexes but for the most part most ARM’s are based on these major three. There are always many questions surrounding the complex and confusing ARM indexes. They are the hardest to understand piece of the ARM puzzle.

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