What does 'index' refer to when getting an ARM?

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What Does Index Refer to When Getting an ARM?

• Dunhill Homes

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The Margin
With ARMs where the index is applied to the
interest rate of the note as an index plus
margin basis, one can use a simple formula to
determine the margin.  Margin difference
between note rate and index rate on which the
note is based.  The calculation is expressed in
terms and would typically be anywhere from 2
to 7.  The lower the margin, the more the
borrower has reason to celebrate since the
maximum rate will increase less at each
adjustment.
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The Fully-Indexed Rate
The Fully-Indexed Rate is what your interest rate
would be on your loan without a Start Rate which
is the introductory rate for the initial fixed
period.  Obviously then, the loan would be higher
once an adjustment is made (usually 1 to 3)
above and beyond the fixed rate that existed
during the initial, fixed period.
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Various Index Options
As mentioned earlier, ARMs can be tied to
different index options and a few include COFI,
LIBOR, MAT and CMT.  Each option has distinct
market characteristics and each one will respond
at its own pace to the fluctuations associated
with the economy.  COFI ARMs, for example, are
associated with rates that move up and down
slowly and often the monthly payments of this
type of ARM will be adjusted once a year.  CMT
ARMs, on the other hand, are volatile and will
move quickly with the market.  A CMT Index tied
to an Adjustable Rate Mortgage will reflect the
condition of the economy and will respond quickly
to the economic changes.  Depending on the index
attached to an ARM, rates can be adjusted yearly,
every three years or every five years.
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efer-to-when-getting-an-arm/