Question:

What do we need adjustable rate mortgage (ARM) indexes for?

Answer:

Adjustable rate mortgage (ARM) indexes are used for checking compliance, comparing loan pricing, for adjustable rate mortgage servicing and portfolio valuation.

Different adjustable rate mortgage (ARM) indexes exist and are in wide use by lenders and borrowers, the most commonly used being:

  • 11th District Cost of Funds Index (COFI)
  • Cost of Savings Index (COSI)
  • Certificate of Deposit Index (CODI)
  • London Inter Bank Offering Rates (LIBOR)
  • Constant Maturity Treasury (CMT or TCM)
  • 12-Month Treasury Average (MTA)
  • Prime Rate Index (Bank Prime Loan)
  • Freddie Mac & Fannie Mae Required Net Yield (RNY)
  • Treasury Bill (T-Bill)

ARM indexes are also used by your loan origination and underwriting software.

An adjustable rate mortgage (ARM) is always tied to some index. The ARM indexes represent the change of objective economic indicators. The lender can pair your ARM to whichever index they choose and usually (about 80% of all ARMs) that is the Prime Rate Index, a 1 Year Treasury Note, London Interbank Offered Rate (LIBOR) or Cost Of Funds Index (COFI).

Some of those ARM indices will move up and down quicker than the rest, so what you may like to do to assure more stability for your adjustable rate mortgage payments is choose an ARM index that will remain relatively stable. Choosing the index to tie your loan to is one of the most important decisions when signing an ARM agreement.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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