Indexes Explained

There are several indexes that a lender may use for your adjustable rate mortgage (ARM). Although lenders can choose from a variety of indexes for your ARM, most likely you will not be able to request a certain index.

The lender offers types of mortgage programs, that the secondary market has already agreed to purchase with a predetermined index.

The Cost of Deposits Index (CODI) is based on rates the bank pays on three-month certificates of deposits. It is characteristically slow to move both up and down.

LIBOR is a comon index that stands for the London Inter Bank Offering Rate. It is the average interest rate that London banks trade on deposits. Generally the LIBOR index is the most volitile, it can fluctuate the biggest amount and the most frequently.

Prime is an idex that is very widely used. The prime rate index is an index that is heavily used by credit card companies, second mortgage lenders, and home equity lines of credit among many others. The Prime rate is what you always hear about in the news going up and down, but most recently going a lot more up (3/1/06).

The COFI, or the 11th District Cost of Fund Index, is the average interest expenses incurred by member banks in the 11th Federal Home Loan Bank district. The 11th district refers to California, Arizona and Nevada. The interest expenses on deposits such as savings and checking accounts, CD's, money market accounts, etc. are reported by the member institutions.

MTA is the Monthly Treasury Average. This index averages the past 12 months average yields on U. S. Treasury securities. Since it is a 12 month average the index is more stable, slower to adjust and generally lags the market for both upward and downward trends.

COSI - cost of savings index. Similar to COFI except it is one particular Bank's own deposit accounts. The Bank borrows money from consumers in the form of deposits, i.e. C/D's, checking and savings accounts, and then lends the money out as home mortgages.

Your mortgage broker will be able to guide you with your decision of choosing the right index for your situation.

Prime Rate is another common index, especially for second mortgage HELOCs.

The U.S. mortgage market also uses the yield on the 10-year Treasury note as a benchmark for setting mortgage interest rates.

The LIBOR is the index commonly used for Subprime ARM loans.

In an adjustable rate mortgage (ARM) the interest rate will adjust a certain amount over the index. The index is the base rate to which a percentage is added to result in the interest rate charged to the consumer.

The index tied to your adjustable rate mortgage is important because it is one of the components used in calculating the new rate on each adjustment date. Your new rate will be calculated by adding the margin percentage specified in your mortgage to the index rate, then applying the rate adjustment cap specified in your mortgage.

» DISCLAIMER: The information contained in this article on 'Indexes Explained' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.