Although a borrower certainly cannot choose which index a lender should use for a particular adjustable-rate mortgage (ARM), the borrower can research various ARMs offered by several lenders to determine which programs contain the best combination of indexes and program benefits. Therefore, in order to be properly informed, the borrower should be aware of some of the more common indexes used:

Treasury Securities Index

  • One-year treasury securities index: This index is widely used in the adjustable-rate mortgage industry. It's most advantageous to the borrower when rates are high and likely to fall. The initial rate is usually 2 percent or more below the fixed market rate. It can adjust quite rapidly, causing quickly changing interest costs. Borrowers using this index should be advised to have strong caps.
  • Three-year treasury securities index: This is best index to use when rates are stable or expected to rise. There may be occasions where a sizable gap exists between its initial interest rate and that of fixed-rate loans. Over time, however, this gap may decrease, diminishing the incentive for using an ARM.
  • Five-year and ten-year treasury securities indexes: These indexes offer good stability due to long periods between rate adjustments; however, a disadvantage is that many times the initial gap between the index and the fixed rate is very small. They're best to use when rates are expected to increase.

Treasury Bills Index

The six-month Treasury bill is the most volatile of these indexes. It's best to use when interest rates are very high and rate decreases appear inevitable. The initial rate is usually 2 percent or more below the fixed rate. However, this index increases and decreases quickly, so it can be termed "fast."

National Average Contract Mortgage (NACR) Interest Rate Index

This index is based on the average monthly contract rate charged by all lenders on mortgage loans for previously occupied homes. It's advantageous for borrowers to use this index when it's at the low point in its cycle. It adjusts very slowly and is therefore favorable to borrowers. In addition to averaging fixed-rate loan interest rates, this index also incorporates other ARM index averages and therefore tends to stay low. And unlike most other indexes, it typically carries no additional margin.

Eleventh District Cost of Funds Index

The "11th district" refers to the 11th District of the Federal Reserve Bank, headquartered in San Francisco, California. This index is generally one of the slowest to adjust, which makes it beneficial to borrowers. Once rates increase, however, it's also slow to decline. This index is therefore referred to as slow – slow to rise and slow to fall. It's particularly good to use on the upswing of inflation (when rates are rising), but not when rates are expected to fall.

London Interbank Offered Rate (LIBOR)

The London Interbank Offered Rate (LIBOR) is an extremely competitive index designed to protect against wide swings in interest payments based on steady adjustments. Accepted internationally, this index has historically helped build worldwide attraction to secondary market investments.

ARM lenders must – by law – make educational materials about adjustable-rate mortgages available to the borrower. Many lenders use the Consumer Handbook on Adjustable-Rate Mortgages, which is available online at the Federal Reserve's website .

Additionally, lenders must provide ARM borrowers with a loan program disclosure for each adjustable-rate program that they're considering. The disclosure information must reveal that the interest rate or term of the loan are subject to change, identify the index used and the source of information for that index, and explain how the index adjusts and when. A statement must also be included advising the borrower to ask the lender about the loan's current margin, interest rate, and discount points.


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