Indexed Rate - The Actual Rate on an ARM

Sam

Interest rates on adjustable rate mortgages (ARMs) depend upon the changes in an economic index. The indexed rate or the fully indexed rate is the sum of this index and the margin. The margin is provided in the mortgage contract and it retains a fixed value throughout the loan term. The margin includes a few percentage points to be added to the index in order to determine the actual rate on an ARM. But it may differ on the basis of the terms and conditions of the transaction.

Example: If the index linked to an ARM is 6% and the margin is 2%, then the indexed rate = 6%+2% = 8%

The rates and payments on an ARM are adjusted at regular intervals as the index fluctuates. Market forces determine the index, which differs from one kind of ARM to another. Some of the common indexes available are:

Monthly Treasury Average (MTA)
Cost of Savings Index (COSI)
London InterBank Offered Rate (LIBOR)
11th District Cost of Funds Index (COFI)

The COFI index is available only on a monthly basis, but the Treasury and LIBOR indexes are published monthly, weekly and even daily. There are some indexed rates that tend to move slowly compared to the rise or fall in market rates. But other indexed rates based on the spot rate (theoretical yield on the Zero-Coupon Treasury Security) move up and down rapidly.

Related Article:

ARM Linked Indexes

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