Which Index Should I choose? - Loans with an adjustable rate feature are tied to an index. Each index has advantages and disadvantages. You will want to research each of these indexes to see the historical movements.Most home equity lines of credit use the Prime index. Some adjustable rate mortgages use the Prime index also. Other indexes that are used for adjustable rate mortgages are Cosi, Cofi, MTA, LIBOR and CODI. Your mortgage broker can assist in finding which index is best for you.
When deciding what index you want for your home loan you should always research to see the historical trends of the index and where it currently is.
The history shows that COSI, COFI, MTA have been lower and stable in the market.
The Monthly Treasury Average, also known as 12-Month Moving Average Treasury index (MAT) is a relatively new ARM index. 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. It is calculated by averaging the previous 12 monthly values of the 1-Year CMT.
Regardless of what type of ARM you are considering, you should always ask your mortgage professional which index the loan will be based off of. It is also important to investigate the past behavior of the index to anticipate future variables. This coupled with knowing your margin will help you to better anticipate future market conditions and the impact it will have on your interest rate.
MTA indexed mortgages - MTA stands for Monthly Treasury Average and is a slow moving index based off of the U.S. Treasury Securities (T-bills).
The 12-MTA index is published by the Federal Reserve Board on the first Tuesday of each month and can be found under Selected Interest Rates – G13.
The Monthly Treasury Average is a relatively new ARM index. 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. It is calculated by averaging the previous 12 monthly values of the 1-Year CMT. Because this index is an annual average, it is steadier than the 1-Year CMT index.
Cost of Savings Index - The Cost of Savings Index (COSI) is an index used to determine adjustments to the interest rate on ARMs (adjustable rate mortgages). COSI is considered to be one of the most stable indices in the industry. The index adjusts monthly and is derived from money that is received by World Savings from consumers in the form of deposits and then lends the money in the form of mortgages and other loans. The interest rates in effect on these deposits are the basis for the COSI index.
The Cost of Savings Index is known for being a rather stable index, meaning less rapid upward and downward movement. Conversely, an index such as the LIBOR (London InterBank Offering Rate) has shown to be much more volatile with sharper up and down movements.
World Savings receives money from consumers in the form of deposits and lends money as home or other loans. The interest rates in effect on these deposits are the basis for the COSI index. It is not based on actual interest paid, but rather the weighted annualized average of all interest rates in effect on World Savings deposit accounts on the last day of each month.
The COSI is not based on actual interest paid on deposit accounts, but rather on a weighted annualized rate of all interest rates in effect on deposit accounts as of the last day of each month.
COFI - 11th District Cost of Funds (COFI) is an index that is used to determine interest rate changes for certain ARMs (adjustable-rate mortgage). COFI reflects the average interest rate paid by the member banks and savings institutions located in Arizona, California and Nevada. This index moves slower to market changes due to the largest part of the index being based on savings accounts. The COFI is one of the most popular and considered the most stable of indices.
The source of these funds for COFI includes savings and checking accounts, money market accounts, short term CD accounts, advances by the FHLB District Bank, and other borrowed money.
The average cost of funds is said to be weighted because the three kinds of funds and their costs are added together before a ratio is computed rather than calculating averages individually for the three sources and using a simple average of the three ratios. This gives the greatest weight to the interest paid on deposits, and explains the delayed reaction of the index to rising fixed-rate mortgages.
Prime Rate - The Prime Rate is the interest rate charged by banks for short-term loans to their most creditowrthy customers. It is also used by lenders as an index for equity lines of credit (ELOCs) in addition to other floating rate loans. Each bank sets their own Prime Rate as they see fit. The Wall Street Journal publishes the Prime Rate that is the base rate on corporate loans posted by atleast 75% of the nations largest banks.
Over the last 10 years, the prime rate has averaged approximately 7%.
If Alan Greenspan and the Federal Reserve raise the short term interest rates by 25%, you will see a 25% increase in the Prime Rate.
The Prime Rate is affected by the Federal Reserve Boards actions to control inflation. The board will raise or lower what is called the discount rate which directly affects the prime rate. The discount rate is raised when their is a threat of inflation and is lowered when there is a fear of recession.
Prime Rate is not directly correlated with mortgage rates but most compensating factors are. So when there is movement in the Prime Rate you will most likely see movement in current mortgage rates.
While the Prime Rate affects Home Equity Loans and short term money, the 30 year fixed mortgage is based off of the mortgage backed security.
A rate index which is the prevailing rate that banks charge to lend money to corporations.
Unlike the Fed Funds Rate and the Discount Rate, the Federal Reserve does not set a target for the Prime Rate. Nonetheless, when the Fed raises or lowers the target for these two short term rates, Prime Rate almost always follows suit because of the change in the cost of money.
Prime rate is the interest rate which banks will charge to their best customers. Any adjustments to the prime rate are publicized in the news and are what moves the indexes in most adjustable rate mortgages, especially HELOCs. Adjustments in the prime rate do not usually affect other types of mortgages, but the same factors that influence the prime rate also affect the interest rates of mortgage loans.
The Federal Reserve Board also know as the FED is contoled by Board of Governors which consist of seven elected officials. These individuals use many factors when determining whether to lower are raise the rates. In fact if you want to get real technical the FED doesn't actually raise or lower rates. They control the monetary policy which in turn affects the interest rate movement up or down.
LIBOR - LIBOR is the London Interbank Offered Rate. LIBOR is the rate charged by one bank to another for lending money. The LIBOR is an international index that follows world economic conditions. LIBOR-indexed ARMs (Adjustable Rate Mortgages) offer borrowers aggressive initial rates and have proven to be competitive with popular ARM indexes like the Treasury bill.
Compared to other Indexes, LIBOR is one of the least stable. It changes more often and by greater amounts
With the LIBOR ARMs borrowers are generally protected from wide fluctuations in interest rates by periodic and lifetime interest rate caps.
