Mortgage Indexes Explained
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Prime Rate
The prime rate is the rate that is tied to home equity loans and many credit cards. The prime rate is directly influenced by the Federal Reserve Board's increase or decrease of the Federal Funds Rate- the index that changes when the Federal Reserve raises or lowers rates. If the FOMC raises rates by .25%, then the Prime Rate will adjust up .25%.
Treasury Bill (T-Bill) indexes
A debt obligation issued by the US government with a maturity of one year or less. Despite popular belief, the T-Bill is not the index that a treasury adjustable mortgage is tied to. The CMT index is the one that is tied to treasury ARMs.
Constant Maturity Treasury (CMT) indexes
An index of the average yields on US Treasury securities adjusted to a constant maturity of one year. This is a common index for Adjustable Rate Mortgages (ARMs) to be tied to. The other is the LIBOR index.
London Inter Bank Offering Rate (LIBOR)
The LIBOR index is effectively the rate that London banks can borrow money from each other. There are many LIBOR indexes, with the 6 month LIBOR being the most important in the mortgage world as many ARMs are tied to the 6 month LIBOR.
12-Month Treasury Average (MTA)
The MTA index is an average of the annual yield of US Treasury securities adjusted to a constant amturity of one year, as made available by the Federal Reserve. This is a common index for the Option ARM mortgage to be tied to and tends to be more stable as it is a 12 month average, so fluctuations up or down in this index are slower.
Cost of Savings Index (COSI)
This index represents an average of interest rates that banks pay to customers on checking, savings, and CD accounts.
11th District Cost of Funds Index (COFI)
This index is the weighted average of the cost of borrowings (funds) to member banking institutions of the Federal Home Loan Bank of San Francisco. This index is also commonly tied to Option ARMs.
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