[quote=Doooh]Explain index and margin in plain people terms and it will probably rattle my memory. I’ll have to pull out the loan docs and look it up otherwise.[/quote]
The index is what the ARM is tied to, that is, what causes it to move up or down. Common indexes are:
6 mo LIBOR
Prime rate
FHLBB Cost of Funds Index (11th Dist COFI in CA)
1-yr T-Bill
3-mo T-Bill
Constant Maturity Treasury (CMT)
What Does ARM Index Mean?
The benchmark interest rate to which an adjustable rate mortgage is tied. An adjustable rate mortgage’s interest rate consists of an index value plus a margin. The index underlying the adjustable rate mortgage is variable, while the margin is constant. There are several popular indexes used for different types of adjustable rate mortgages.
This is also referred to as the “fully indexed interest rate”.
Investopedia explains ARM Margin
An ARM’s margin is a very important and often overlooked part of the loan’s interest rate. The margin is frequently negotiable with the lender. Different margins should be expected with different indexes as various popular indexes differ in their historical values relative to each other. In other words, the lower the index level, the higher the expected margin. When various index/margin options are available to a borrower, an analysis should be performed to determine which is the most economical.
