An index is a number to which the interest rate on an adjustable rate mortgage (ARM) is tied. It is generally a published number expressed as a percentage, such as the average interest rate or yield on U.S. Treasury bills. A margin is added to the index to determine the interest rate that will be charged on ARMs. This interest rate is subject to any caps associated with the mortgage.
The interest rate changes on an ARM are tied to some type of financial index. Some of the most common type of indexed ARMs are:
-- Treasury-Indexed ARMs
-- CD-Indexed ARMs (Certificate of Deposit)
-- Cost of Funds-Indexed ARMs (COFI)
-- LIBOR-Based ARMs
When comparing ARMs, look at how the index to which it is tied has performed recently. Your lender can provide information on how to track the index and a history of the index they use.