Index
(Definition)- The index is a published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage (ARM) and that earned by other investments (such as one- three-, and five-year U.S. Treasury Security yields, the monthly average interest rate on loans closed by savings and loan institutions and the monthly average Costs-of-Funds incurred by savings and loans). This difference is then used to adjust the interest rate up or down on an ARM.
More about Index
Margins and indices establish the final interest rate. The margin, or lender’s profit, is the amount a lender adds to the index on an ARM to establish the adjusted interest rate. For example, if you have a mortgage and the index is 8 percent and the margin is 2.75 percent, your final interest rate will be 10.75 percent.
Before you even look at margins and indices on mortgages, you will first need to decide between a fixed-rate mortgage and an ARM. If interest rates are low, you might want to go with a fixed-rate mortgage because it helps protect you against future increases in interest rates. But if interest rates are high, an ARM might give you the opportunity to take advantage of lower interest rates, should they occur in the future. An ARM might also be right for you if you only plan on keeping your home for a short amount of time.
If you have decided that an ARM is right for you, shop around for the loan program with the best features. Margins and indices are just two components to consider when you are looking at ARMs. You will also need to look at other factors including initial interest rates, closing costs and caps.
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