Mortgage Index What it Means How it Works
Betsy’s career in international finance has evolved into journalism, combining her professional experiences and academic background.
A mortgage index is the benchmark interest rate for an adjustable-rate mortgage (ARM)’s fully indexed interest rate. The interest rate for an ARM consists of an index value and an ARM margin, with the margin remaining constant and the index value varying. There are several benchmark interest rates that serve as mortgage indexes.
Common mortgage indexes include the prime lending rate, the one-year constant maturity treasury (CMT) value, the one-month, six-month, and 12-month LIBORs, and the MTA index, which is a 12-month moving average of the one-year CMT index.
The choice of mortgage index can impact the interest rate charged by the lender during specified intervals. Depending on the borrower’s belief about future interest rate changes, selecting an index, such as the MTA index, can provide a more economical option due to the lag effect created by its moving average calculation.
Each mortgage index has unique characteristics. The prime lending rate is a short-term interest rate used by various lenders, including credit unions and banks, in the United States. It is used for pricing short-term and medium-term loans or for adjustments on long-term loans. The consistency of the prime rate nationwide allows for loan comparisons regardless of location.
The prime rate remains the same throughout the country, making the specific aspects of the mortgages more important in determining loan competitiveness. Factors such as the loan’s margins and whether the interest rate is below the prime rate are crucial in comparing loan offers. Borrowers with excellent credit may be offered mortgage rates significantly lower than the prime rate index, providing reassurance about the competitiveness of the loan.
