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To select the best index you and your loan rep should review your needs and the loan choices with these issues in mind:

  • Time horizon: Determine your relevant planning horizon (job transfer, trade-up home, refi possibilities, Section 1031 exchange, family size, and so on) that will affect the number of years you might hold your mortgage.
  • Review possibilities: Look at the ARM and fixed-rate loans that might fit your needs.
  • Historical perspective: Compare the respective ARM index rates to where they stand now relative to their history.
  • Index versus CPI: Compare the respective ARM index rates to the current and expected rates of inflation.
  • Payment increases: Go through period by period to calculate potential payment increases.
  • Qualifying and affordability: Eliminate loans that would not work because you could not qualify for or afford them.

No one can simplify the process of choosing an ARM product and its corresponding index9 partly because no permanent rules or relationships

9 Many ARM products do not permit you to choose an index. They're offered as a package of index and features that you choose or reject in total.

exist.10 You can, however, examine the evidence. Make your calculations and then choose the loan that appears most likely to optimize your total outcome—including wealth building through mortgage paydown.

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