What is a Mortgage

Down Payment

Closing Costs

Escrow

The Mortage Payment

Amortization

Understanding APR

Private Mortgage Insurance

How to figure Mortgage Interest

Mortgage Fees

Interest

The Index

The index

The interest rate on an ARM is made up of two parts: the index and the margin. The index is a measure of interest rates generally, and the margin is an extra amount that the lender adds. Your payments will be affected by any caps, or limits, on how high or low your rate can go. If the index rate moves up, so does your interest rate in most circumstances, and you will probably have to make higher monthly payments. On the other hand, if the index rate goes down, your monthly payment could go down. Not all ARMs adjust downward, however be sure to read the information for the loan you are considering. Lenders base ARM rates on a variety of indexes. Among the most common indexes are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an index, rather than using other indexes. You should ask what index will be used, how it has 8 | Consumer Handbook on Adjustable-Rate Mortgages fluctuated in the past, and where it is published.

© 2007 Scottie Watts