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ARMS and Their Indexes

An index is a reference point, used to measure changes in things like interest rates, the stock market and prices of consumer goods. These indices are what lenders utilize to "adjust the rates" on mortgages.

Lenders base their adjustable-rate mortgages on a variety of different indices. While each index has distinct characteristics, the most common ones include:

  • 12-Month Treasury Average or MTA Index: an economic indicator from the Federal Reserve based on the average annual yields of U.S. Treasury Securities.
  • Bank Prime Loan or Prime Rate Index: an index of the interest rate that the majority of banks charge their most prominent and creditworthy clients.
  • London Inter Bank Offer Rate or LIBOR Index: an index of the interest rate that banks charge one another for short-term loans in foreign markets.
  • Treasury Bill or T-Bill: an index based on the results of auctions by the United States Treasury of T-Bills, notes, and bonds.

Other indices used as a basis for products in mortgage banking include:

  • Certificate of Deposit Index or CODI: an index of interest rates paid on certificates of deposit (CDs) to determine rate fluctuations in adjustable -rate mortgages.
  • Cost of Funds Index or COFI: an index of the weighted average rate paid by savings institutions for fund sources, usually by 11th Federal Home Loan Bank District members.
  • Cost of Savings Index or COSI: an index representing the average interest rates that banks pay to customers on checking, savings, and CD accounts.

Like anything in the financial sector, each index has pros and cons. By reviewing the past performance of each index, you can judge which provides the best basis for your mortgage needs.

This graph provides an overview of how certain indices have performed since 1990, compared to the 30-year fixed rate mortgage. For a more in-depth analysis, please utilize the resources on this site or contact one of our Mortgage Planners today to explore various ARM options suitable for your particular situation.