What Does Index Refer to When Getting An ARM?

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What Does Index Refer to When Getting an ARM?

• Nathan Carlisle

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What is an ARM?

• An Adjustable Rate Mortgage, or ARM, is comprised
  of two components that determine the rate of the
  loan
• 1) index valuethe index value is variable
  (adjustable) and is set in motion by various
  dynamics within the housing market and the
  economy.  Different ARMs can be attached to
  different index options.
• 2) marginthe margin is constant and is an
  unvarying and agreed-upon number of percentage
  points that are added to the index which will
  determine the loans rate.

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The Margin
An index can be applied to the interest rate of
an ARM as an index plus margin condition and
determining the margin is important and quite
easy  margin difference between note rate and
index rate on which the note is based.
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The Fully-Indexed Rate
With an ARM, the Start Rate is the introductory
rate for the initial fixed period.  The term
Fully-Indexed Rate refers to what your interest
rate would be on your loan without a Start Rate.
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Various Index Options
ARMs can be tied to different index options. 
Here are a few examples  COFI, LIBOR, MAT, and
CMT.  Each index option has its own personality
in that each one will respond differently to
economic fluctuations. 
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• Thank you

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