The interest rate index is how lenders determine the interest rate on adjustable rate mortgages. The interest rate on your mortgage is tied to a specific index rate. . Common indexes are Treasury Constant Maturities or Cost of Funds indices. All the indices are published regularly in readily available sources.
Margins and indices establish the final interest rate. The margin is the amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate. For example, if you have a mortgage and the index is 6 percent and the margin is 2.75 percent, your final interest rate will be8.75 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 surges 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.
July 24, 2006
