The interest rate on an ARM is made up of two parts: the index and the margin. The index is a measure of interest rates generally, and the margin is an extra amount that the lender adds. Your payments will be affected by any caps, or limits, on how high or low your rate can go. If the index rate moves up, so does your interest rate in most circumstances, and you will probably have to make higher monthly payments. On the other hand, if the index rate goes down, your monthly payment could go down. Not all ARMs adjust downward, however—be sure to read the information for the loan you are considering.
Definition of Common Adjustable Rate Indices
COFI or 11th District Cost of Funds.
PROPER NAME: Monthly Weighted Average Cost of Funds for 11th District SAIF-Insured Institutions.
This index, used primarily for ARMs with monthly interest rate adjustments, is calculated by the Federal Home Loan Bank of San Francisco. The 11th District represents the SAIF-insured savings institutions (savings & loan associations and savings banks) in Arizona, California and Nevada.
The cost of funds reflects the interest rates paid by institutions for savings accounts, FHLB advances, money borrowed from commercial banks, and other sources.
Since the largest part of a cost of funds index is interest paid on savings accounts, this index lags behind the economy. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general. However, such ARMs often have payment caps, but no month-to-month interest rate caps.
This index is available by calling (415) 616-2600. The value changes once a month and is published at 3 P.M. on the last day of each month.
1 Year Treasury Bill
PROPER NAME: Yield on Treasury Security Adjusted to a Constant Maturity of One Year
The One-Year Treasury Security index (or “T-Sec”) is associated with ARMs that feature annual rate adjustments. It is calculated by the Federal Reserve Board and has both a weekly and monthly value; most lenders use the weekly value. This index reflects the state of the economy and responds quickly to economic changes.
Confusion can arise when some lenders use the term “one year Treasury bill.” Most one-year ARMs — but not all — are tied to the Constant Maturity of the One Year Treasury Security.
This index is available on a recording at (415) 974-2859
If you have a loan you are interested in refinancing you can generally find the details (Index, Margin and life cap) by looking in paragraph #4 of the “Adjustable Rate Note” or “Adjustable Rate Rider.” This will be with the papers you received from the escrow company.
Stands for London Interbank Offered Rate. It is a measure of commercial lending rates of a group of London banks. It is similar to the Prime rate. It moves up and down rapidly. It can best be obtained daily from the Wall Street Journal.
6 Mos. CD
This is a measure of what banks are paying on 6 month certificates of deposit. It moves less rapidly than LIBOR or T-bill but more rapidly than COFI.