Below is a description of five of the most common indices used in adjustable rate mortgages (ARMs).
London InterBank Offered Rate (LIBOR) - The index is quoted for one month, three months, six months as well as one-year periods. It is based on rates that contributor banks in London offer each other for inter-bank deposits. From a bank's perspective, deposits are simply funds that are loaned to them. So in effect, a LIBOR is a rate at which a fellow London bank can borrow money from other banks. Rate calculations are complex as they incorporate variables such as time, maturity and currency rates. There are hundreds of LIBOR rates reported each month in numerous currencies. We only report the 1 Year LIBOR as published monthly by Fannie Mae. This is a LIBOR for a one-year deposit in U.S. Dollars during a given month. This index is updated monthly.
Cost of Funds Index (COFI) - The 11th District Cost of Funds Index is the weighted average of the cost of borrowings (funds) to member banking institutions of the Federal Home Loan Bank of San Francisco (the 11th District). The index rate tends to lag market interest rate adjustments and is relatively stable because institutions borrow money for varying terms and do not pay market rates for all of their funds. This index is reported monthly.
1 Year Constant Maturity Treasury Rate (CMT) - This index is an average yield on United States Treasury securities adjusted to a constant maturity of 1 year, as made available by the Federal Reserve Board. Yields are interpolated by the United States Treasury from the daily yield curve. This curve, which relates the yield on a security to its time to maturity, is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. This rate is updated after the Federal Reserve releases its data on the first Monday of each month.
12 Month Treasury Average (12 MTA) - This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. In plain English, this index is calculated by averaging the previous 12 rates of the 1 Year Constant Maturity Treasury Rate (CMT). Because this particular index is an annual average, it is more steady than the 1 Year Treasury Index. It fluctuates slightly more than the 11th District Cost of Funds Index, although its movements track each other very closely. This rate is updated after the Federal Reserve releases its data on the first Monday of each month.
Prime Rate - The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). The rate is almost always the same amongst major banks. Adjustments to the prime rate are made by banks at the same time, although, the prime rate does not adjust on any regular basis. The rates reported below are based upon the prime rates on the first day of each respective month.
