Common Adjustable Rate Mortgage Indices

The One Year Treasury Index

This index is the basis for about 75% of all ARMs. The One-Year Treasury Index is based on the weekly average yield on U.S. Treasury Securities and coincides with interest rates paid by the Federal Government. It will generally reflect the current monetary conditions and economic trends of the nation.

One aspect of the One Year Treasury Indexis that when interest rates fall, the interest rate on your ARM will also fall, usually with little delay. Conversely, when interest rates rise, your ARM interest rate will probably rise at the loan's next regularly scheduled adjustment period. Because of this, it is important to pay close attention to the payment caps that affect your loan. Make sure you have the safeguards you need in place.

The 11th District Cost of Funds Index-COFI

The 11th Distict refers to the 11th Federal Home Loan Bank District, which includes the states of California, Arizona and Nevada. The Cost of Funds index actually is a measure of the expense financial institutions in the 11th District incur in order to attract funds or deposits. It makes sense that they would try to match the interest they charge on mortgages to their actual cost of doing business. Therefore, the Cost of Funds Index reflects the weighted average cost of savings,borrowings and advances of savings and loan institutions in the 11th District.

The COFI is generally one of the slowest to adjust which makes it very popular among borrowers when interest rates are rising. Because this index tends to react more slowly to fluctuating markets, adjustments to ARM interest rates usually lag behind most other loan indices. Once rates increase however, they are also slow to decline. This is why the index is often referred to as slow-- slow to rise,slow to decline.

The London Interbank Offered Rates-LIBOR

The LIBOR index is a relative newcomer to the mortgage scene. LIBOR stands for the London Interbank Offered Rates, which is the average rate of interest that five major London banks are willing to pay each other for U.S. dollar deposits. The deposits are in dollars, not pounds, and are used tofacilitate international trade.

The LIBOR index tends to move at a similar pace to the One Year Treasury Index, and is certain to react faster than the 11th District Cost of Funds. However, because LIBOR-indexed loans have an international appeal to investors in certain economic climates, LIBOR loans can be priced very competitively.

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