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Adjustable Rate Mortgages
Variable or adjustable loan is loan whose interest rate, and accordingly monthly payments, fluctuate over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application.
Well knownARM indexes include:
These indexes are the weekly or monthly average yields on U.S. Treasury securities adjusted to constant maturities.
Constant Maturity Treasuries is a set of "theoretical" securities based on the most recently auctioned "real" securities: 1-, 3-, 6-month bills, 2-, 3-, 5-, 10-, 30-year notes, and also the 'off-the-runs' in the 7- to 20-year maturity range. The Constant Maturity Treasury rates are also known as "Treasury Yield Curve Rates".
Yields on Treasury securities at "constant maturity" are interpolated by the U.S. Treasury from the daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
The CMT indexes are volatile and move with the market. They reflect the state of the economy, and respond quickly to economic changes. These indexes react more slowly than the CD index, but more quickly than the COFI index or the MTA index
| The following CMT indexes are the most often used for ARMs: |
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1-Year Constant Maturity Treasury index (1 Yr CMT)
This is the most widely used index. Roughly half of all ARMs are based on this index. It's used on ARMs with annual rate adjustments. It is also referred to as the 1-Year Treasury Bill (1Yr T-Bill) [see note], the 1-Year Treasury Security (1Yr T-Sec), or the 1-Year Treasury Spot index.
3-Year Constant Maturity Treasury index (3 Yr CMT)
This index is less popular than the 1-Year CMT. ARMs based on the 3 Year CMT will adjust every three years (3 Year ARMs). It may be referred to as the 3-Year Treasury Security (3Yr T-Sec) index.
5-Year Constant Maturity Treasury index (5 Yr CMT)
Same as the 3 Year CMT, but ARM loans indexed to the 5 Year CMT will adjust once every five years (the ARM's adjustment period is usually the same as the security's constant maturity.
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Treasury Bill (T-Bill)
Treasury bills are issued by the U.S. government with maturities of 1, 3 and 6 months (4-week, 13-week, 26-week bills or 28-day, 91-day, 182-day bills) in order to pay for the national debt and other expenses. The 3- and 6-month Treasury bills are auctioned every Monday and the resulting figures are released to the public the next day. Treasury bill auction results provide the discount rate*, investment yield, and price for recently auctioned bills.
* The discount rate is an annualized rate of return based on the par value of the bills and is calculated on a 360-day basis. The investment yield, or coupon-equivalent yield, is calculated on a 365-day basis and is an annualized rate based on the purchase price of the bills and reflects the actual yield to maturity.
The Monthly Treasury Average, also known as 12-Month Moving Average Treasury index (MAT) is a relatively new ARM index. This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. It is calculated* by averaging the previous 12 monthly values of the 1-Year CMT.
* The MTA Index is calculated by us monthly at or about 7:00 PM on the last business day of each month using the reported Treasury Yield Curve Rates and is usually published on our website by the first business day of the following month. We calculate the average by adding the 12 most recently published monthly yields together, dividing the result by 12 and rounding it to the nearest 10,000th of one percentage point.
Because this index is an annual average, it is more steady than the 1-Year CMT index. The MTA and CODI indexes generally fluctuates slightly more than the 11th District COFI, although its movements track each other very closely.The MTA and COFI-indexed ARMs work much the same way. ARMs tied to the MTA index may have the potential for negative amortization (like those tied to the 11th District COFI). The MTA is the most widely usedOption ARM loan index.
The Certificate of Deposit Index (CODI) is the 12 month average* of the monthly average yields on the nationally published 3-Month Certificate of Deposit rates.
* The CODI Index is calculated by Mortgage-X using the H.15 Federal Reserve Statistical Release data and is usually published on our website on the first Monday of the following month. Mortgage-X calculates the average by adding the 12 most recently published monthly yields together, dividing the result by 12 and rounding this result to the nearest 10,000th of one percentage point. Information on monthly yields on 3-month certificates of deposit (secondary market) is published by the Federal Reserve Board.
Because this index is an annual average, it is more steady than CMT and CD indexes which are very volatile and generally considered to react quickly to change in the market. The CODI and MTA indexes generally fluctuate slightly more than the 11th District COFI, although their movements track each other very closely |
This index reflects the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada.
Since the largest part of the Cost Of Funds index is interest paid on savings accounts, this index lags market interest rates in both uptrend and downtrend movements. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general, which is good for you if rates are rising but not good for you if rates are falling.
It should be noted that although COFI generally follows trends in market rates, it can move in an opposite direction over the near term (one of these periods is marked on the historical graph above).
The 11th District Cost Of Funds Index is the slowest moving and most stable of all ARM indexes. It smoothes out a lot of the volatility of the market.
The 11th District Cost of Funds index is one of the most popular ARM indexes. This index is primarily used for ARMs with monthly interest rate adjustments. Because this index generally reacts slowly in fluctuating markets, adjustments in your ARM interest rate will lag behind another market indicators. Many lenders believe COFI-indexed ARMs are some of the best deals available on the market today.
The Golden West Financial Corporation Cost of Savings Index (GDW COSI) is the weighted average of the rates of interest on the deposit accounts of the federally insured depository institution subsidiaries of Golden West Financial Corporation (GDW). All of the depository institution subsidiaries of Golden West Financial Corporation operate under the name World Savings.
World Savings receives money from consumers in the form of deposits and lends money as home or other loans. The interest rates in effect on these deposits are the basis for the GDW COSI index. It is not based on actual interest paid, but rather the weighted annualized average of all interest rates in effect on World Savings deposit accounts on the last day of each month.
Both the original COSI (GDW COSI) and the W-COSI (Wachovia COSI) adjust monthly and have a one-month reporting lag. They are computed on the last day of each calendar month and are announced on or near the last business day prior to the fifteenth day of the following calendar month.The Cost of Savings index considered to be among the most stable ARM indexes in the industry. It is one of the most widely used Option ARM loan indexes.
Many COSI-indexed ARMs often have minimum payment change caps (usually, up to 7.5% of minimum payment amount), as well as lifetime interest rate caps (usually, about 12%) but no periodic interest rate caps creating the possibility fornegative amortization.
London Inter Bank Offering Rate (LIBOR) is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International financial market. London is the center of the Euromarket in terms of volume.
The LIBOR is an international index which follows the world economic condition. It allows international investors to match their cost of lending to their cost of funds. The LIBOR compares most closely to the 1-Year CMT index and is more open to quick and wide fluctuations than the COFI rate. LIBOR-indexed ARMs offer borrowers aggressive initial rates (lower than many other ARMs) and has proved to be competitive with such popular ARM indexes as the 11th District Cost of Funds, the 6-Month Treasury Bill, and the 6-Month Certificate of Deposit. With the LIBOR ARMs borrowers are generally protected from wide fluctuations in interest rates by periodic and lifetime interest rate caps. LIBOR ARMs usually do not have negative amortization
These indexes are averages of the secondary market interest rates on nationally traded Certificates of Deposit. The Certificates of Deposit, also known as CDs, are usually issued by banks and other financial institutions. They pay a fixed rate of interest for a specific period of time.
The Certificates of Deposit of various maturities, including 1-Month, 3-Month, 6-Month and 1-Year, are used as ARM indexes. The 6-Month Certificate of Deposit (6-Mo CD) is the most popular of the CD indexes.
The 12-month moving average of the monthly 3-Month CD is called CODI
The Prime Rate is the interest rate charged by banks for short-term loans to their most creditworthy customers whose credit standing is so high that little risk to the lender is involved. Only a small percentage of customers qualify for the prime rate, which tends to be the lowest going interest rate and thus serves as a basis for other, higher risk loans.
The rate is almost always the same amongst major banks.Adjustments to the prime rate are made by banks at the same time; although, the prime rate does not adjust on any regular basis. The prime rate is not very volatile index however it generally rises quickly but declines very slowly.
Strictly speaking, this is not an ARM index, however it is included here because this yield is frequently used as a basis for converting an adjustable rate mortgage to a fixed rate mortgage.
Fannie Mae* has many different yields.
* Fannie Mae, a federally chartered, shareholder-owned company, is the nation's largest source of funds for mortgages. It purchases mortgages from lenders, freeing up cash so the lenders can make more loans.
To determine exactly which Fannie Mae yield your mortgage is tied to, you should contact your current mortgage lender or look in your mortgage note. The most popular yield for 30-year fixed rate mortgages is the 60-day delivery RNY -- the minimum yield that Fannie Mae require on any given day for 30-year fixed rate mortgages delivered for sale to Fannie Mae by lenders within 60 days
| The index is the weighted average rate of initial mortgage interest rates paid by home buyers reported by a sample of mortgage lenders for loans closed for the last 5 working days of the month*. The weights are determined by the type, size and location of the lender. The rate is based on conventional fixed and adjustable rate mortgages on previously occupied non-farm single-family homes.
The National Average Contract Mortgage Rate is derived from the Federal Housing Finance Board's Monthly Interest Rate Survey (MIRS)** and is reported by the FHFB on a monthly basis.
Many lenders use this rate to reset the interest rate on ARMs. In the early 1980s, it was the only index rate that federally chartered savings and loan associations could use as an adjustable rate mortgage index | | 
