What Indexes Can You Choose

Lenders can confound you with more index choices than Baskin-Robbins has flavors. Listed below are four such ARM indexes.

  1. Treasury Constant Maturities (TCM). To fund the debts of the United States government, the Treasury issues interest-bearing notes, bills, and bonds with maturities that range from 30 days to 30 years. Most TCM ARMs are linked to the one-year TCM. Three-year, 5-year, and 20-year TCMs also may be available to you. After their start-rate ends, most hybrid ARMs link to the one-year TCM (not the Treasury Bill, as this index is mistakenly called by many).
  2. London Interbank Offered Rate (LIBOR). This index reflects the interest rate often used by London banks when they lend short-term to other European banks. American lenders may use it for mortgages because they frequently sell such loans (mortgage-backed securities) to European investors.
  3. National Average Contract Mortgage Interest Rate (NACR). This index averages the mortgage rates charged by lenders on loans for owner-occupied housing (not including new construction). This index adjusts more slowly than either the one-year TCM or the LIBOR.
  4. Eleventh District Cost of Funds (COFI). This index averages the interest rates that many Western banks (California, Arizona, Nevada) pay their depositors. Similar to the NACR, this index adjusts slowly.

Many loan advisors recommended the COFI index to ARM borrowers throughout the 1980s and 1990s as interest rates consistently trended downward. These advisors emphasized that slow changes in this index would protect borrowers from bearing the brunt of interest rate spikes.

0 0

Post a comment