For certain people, adjustable-rate mortgages are the preferred loan format. This is a format where mortgage rates can change through the life of the loan, and the number you’re repaying to mortgage lenders may change.
For people who stand to potentially benefit from the benefits of these kinds of loans (lower starting rates and requirements in many cases, for one), knowing which factors influence the adjustable mortgage rates in these loans is vital. Courtesy of Altius Mortgage and our partners at Mortgage Ogden, here are the basics on how changing mortgage rates are influenced.
Also called reference rate, this is the average rate at which a given financial institution borrows unsecured funds. The index is the largest factor behind changes in interest rates for ARM loans. Different mortgages use different indexes – in the United States, these are the most common:
- COFI: Short for 11th District Cost of Funds Index, this is based on reports from qualified member banks of the Federal Home Loan Bank of San Francisco. It’s updated once a month.
- LIBOR: Short for London Interbank Offered Rate, this is updated daily and is used most commonly by private lenders.
- MTA: This represents 120-month Treasury Average Index, and is based on a 12-month average of yields of securities issued by the US Treasury. This index is calculated monthly, and is considered very stable.
- CMT: Or Constant Maturity Treasury, this is also based on the US Treasury yield, though it has to do with maturity dates on securities. CMT is more volatile than many others.
- National Average Contract Mortgage Rate: An index based on the rates homebuyers paid if they bought within five working days of the end of the month. This is the traditional, most common index for ARM loans.
Because sharp rises could put people in a huge financial bind, index caps were created. These cap how much interest can change, either for the life of the loan or within a certain specific period. However, be aware that index caps only apply for interest – extra money above the cap is redistributed toward the balance, and can lead to higher monthly payments.
This is a fixed number that’s settled on before the loan. It’s not adjusted during the loan, so it lends some stability.
In some cases, you can receive a discount for a year or two on your ARM. Speak to your broker about whether this is possible in your situation.
Want to learn more about mortgages, or any of our services? Speak to one of our mortgage brokers at Altius Mortgage today.