Adjustable-Rate Mortgages (ARMs) – Indexes

Adjustable-Rate Mortgage interest rates and of course, monthly payments, fluctuate over the life of the loan. With an Adjustable Rate Mortgage, periodic adjustments that are based on changes in a defined “index” are made to the interest rate. The “index” for a consumers particular loan will be established upon application for the mortgage.

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Common and well known ARM Indexes

• 12-Month Treasury Average – (MTA or MAT). The MTA is most widely utilized on Option ARM loan index. Known as a 12-Month Moving Average Treasury index (MAT) is a relatively new ARM index. ARMs tied to the MTA index may have the potential for “negative amortization”.

• Constant Maturity Treasury (CMT). CMT are the weekly and/or monthly average yields on US Treasury securities adjusted to “constant maturities”. CMT indexes move with the market and are volatile. The indexes reflect the state of the economy.

• 1-Year Constant Maturity Index (1 Yr. CMT) – most popular, widely used index.

• 3-Year Constant Maturity Treasury Index (3 Yr. CMT) – is less popular than the 1-Year CMT. ARMs based on the 3-Year CMT adjust every three years (3 year ARMs).

• 5-Year Constant Maturity Treasury Index (5 Yr. CMT) – Same as the 3-Year CMT except ARM loans indexed to the 5-Year CMT will adjust every five years.

• Certificate of Deposit Index (CODI). The CODI index is the 12-month average of the monthly average yields on the nationally published 3-Month Certificate of Deposit rates.

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• Cost of Savings Index (COSI). The COSI index is the “weighted-average” of the rate of interest on the deposit accounts of the federally-insured depository institution subsidiaries of Golden West Financial Corp. (GDW). All depository subsidiaries of GDW operate under the name of World Savings. The COSI index is considered to be among the most stable ARM indexes in the industry and it is also one of the most commonly used Option ARM loan indexes.

• 11th District Cost of Funds Index (COFI). The COFI index reflects the weighted-average interest rate paid by the 11th Federal Home Loan Bank District savings institutions. The 11th District COFI index is the slowest moving, yet most stable of all ARM indexes. It appears it smoothes out much of the market volatility. The COFI index is one of the most popular and common ARM indexes, used primarily for ARMs with monthly interest rate adjustments. COFI is one of the most commonly used Option ARM indexes.

• London Inter Bank Offering Rates (LIBOR). LIBOR is an average of the interest rate on dollar-denominated deposits. LIBOR is an international index which follows world economic conditions. Several different LIBOR rates are used widely as ARM indexes: 1-, 3-, 6-Month, 1-Year LIBOR. The 6-Month LIBOR is most common.

• Treasury Bill (T-Bill). The monthly 6-Mnth T-Bill index is most often utilized and ARMs tied to it typically adjust every six months.

• Certificates of Deposit Indexes (CD). The 12-month moving average of the monthly 3-Month CD is called CODI.

• Bank Prime Loan (Prime Rate). Details: Prime Rate is the interest rate charged by banks for short-term loans to only their most creditworthy customers so there is little risk to the lender involved; a small percentage of consumers qualify for Prime Rate.

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