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What Criteria Is Used To Determine A Change In An ARM Mortgage Loan?

By Ann White

How to interpret and understand what criteria is used to determine a change in an ARM mortgage loan.

What overall criteria are used to determine a change in an ARM mortgage loan?

The determination of ARM mortgage interest rates are based upon fluctuating market indexes that have distinctive characteristics. The interest rates for ARM mortgage loans will change at periodic intervals depending upon the agreed upon index chosen at the time of loan initiation About 80% of ARM loans are based upon either constant mortgage treasury (CMT), 11th district cost of funds index (COFI) and the London inter bank offerings rate (LIBOR) which will be discussed below as part of item 2.

What are the most popular criteria used for changing an ARM mortgage loan?

The CMT index is the most widely (50%) used for annually adjusted ARM loans. This index is based upon the yields of recently auctioned Treasury Securities reflected at constant maturity per the daily yield curve computed over the interest adjustment period (1 year, 3 years or 5 years). Another popular index used for ARM changes to interest rates is the COFI which represents the weighted average interest paid by the 11 District of the Federal Home Loan Bank to its members located in California, Nevada and Arizona. This index is mainly used for ARM loans that adjust monthly. The advantage of this rate is that it moves more slowly which is good during periods of falling interest rates. The other popular index rate is LIBOR which is the average of the interest rate on dollar denominated Eurodollar deposits traded between banks in London which is a major component of the international financial market. LIBOR ARM’s tend to protect borrowers from wide fluctuations of interest rates and offer periodic and lifetime rate caps. The most popular index used for rate adjustments is the 6 month libor period.

What other types of criteria are used for changing an ARM mortgage loan?

When discussing what criteria is used to determine a change in an ARM mortgage loan, other less popular types of methods are utilized such as T-Bill averages, 12 month Treasury averages, certificate of deposit and savings indexes and the prime rate averages.

Summary

The above points clearly indicate that you need to know what criteria are used to determine a change in an ARM mortgage loan if you are planning to obtain such financing.

Related posts:

1. What Causes My Mortgage Interest Rate To Change?
2. What Is A “Coffee” Home Mortgage Loan?
3. What is a LIBOR Mortgage Loan?
4. How Will My Rate Change On My Adjustable Mortgage?
5. What is a COFI mortgage interest rate?