What is an Interest Rate Index??
Every adjustable interest rate mortgage is based on an interest rate index. Even the fixed/adjustable rate loans that are fixed for the first three years (3/1), the first five years (5/1), the first seven years (7/1), or the first 10 years (10/1) are based on an interest rate index AFTER the fixed interest rate period. From that point forward, after the fixed rate period, the rate will be determined by the interest rate index and the margin added together.
What are the more popular Rate Indexes?
Lenders will select one or more index to offer to their clients. The idea is to provide borrowers an opportunity for lower interest rates in the initial years of their mortgage, then raising it usually within guidelines after those early years. The Index is one of two very critical elements in every adjustable rate mortgage. The other very important element is the margin. Here are the popular indexes:
- MTA (monthly treasury average): This interest rate index is a six month to twelve month average of the 6 Month T-Bills or the 1 Year T-Bills determined at the beginning of every month. Since it averages the rates over time it will move up slowly and it will move down slowly.
- LIBOR(London Interbank Index):This index is based on the actual interest rates being offered by the member banks of the BBA (British Banking Association). The rate is determined daily and is now the most common index for adjustable interest rate mortgages.
- CD(Certificate of Deposit): This is the weekly interest rate calculation of the actual bank certificates of deposit yields. It is popular with certain U.S. banks.
- COFI(Cost of Funds Index): This is an index popular in the 1990’s. It is a monthly calculation of the savings rates of all the Federally chartered Savings and Loans in the 11th District of the Federal Reserve headquartered in San Francisco and including the states of California, Arizona, and Hawaii. Since this index includes all of the savings accounts from 3-month to 30-year commitments which change from every 3 months to every 30 years, this index is very slow to move UP or DOWN. It is the most stable index of rates.
- 1 Year Treasury (Cost of U.S. Treasury bills sold on the New York Stock Exchange):Each Monday the U.S. Government auctions their one year Treasury Bills through the New York Stock Exchange. The price of this auction determines the 1 Year Treasury Index.
| Index Rates Week of June 19 | ||
| MTA | 4.282% | |
| Libor | 5.279% | |
| CD | 4.318% | |
| COFI | 3.759% | |
| 1 Yr. T-Bill | 5.230% | |
