ARM indices: which is the best?

ARM indices drive ARM mortgage rates

While no one can predict the distance Future of mortgage rates With a high level of accuracy, it is important to make an educated estimate of ARM rates before opting for any of these loans. ARM indices, margins, and caps determine future price changes and must be assessed together when you do buy an ARM.

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The most common ARM indices

The most commonly used ARM indices are T-Bill, CMT, COFI, LIBOR, and MTA. Here is a quick rundown of these financial activity metrics. “Today” refers to February 24, 2017, at the time this post was written.

T-bill

The prices paid in federal auctions of 12 month Treasury bills, debentures and bonds determine the value of this index. Its current level is 0.78 percent at this point in time. In the past 20 years it was 6.24 percent and only 0.02 percent. Its median value over the last 20 years is 1.43 percent.

So if you have an ARM with a 2.5 percent margin, your interest rate could drop to 2.52 percent and even 8.74 percent if the index continues the pattern it has established over the past 20 years. The median that you could consider the more likely scenario over time is 3.93 percent.

Of course, these interest rates can be adjusted to match the upper and lower limits of the loan, which limit how high and low the interest rate can go up over the life of the loan. If your loan has a lower limit of three percent and an upper limit of eight percent, your interest margin is smaller.

CMT

The one-year Constant Maturity Treasury (CMT) is similar to the T-Bill index – it is derived from the auction prices of government-backed debt instruments. The Federal Reserve Board calculates it from the average monthly return on a number of government bonds, adjusted for a one-year term.

It is currently 0.81 percent. Its lowest value in the last 20 years was 0.08 percent and the highest value was 6.44 percent. The median during this time was 1.60 percent.

With a margin of 2.5 percent, the lowest rate (excluding caps and floors) would have been 2.58 percent and the highest 8.94 percent. The median would be 4.1 percent.

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COFI

The 11th District Cost Of Funds Index (COFI) reflects the interest rate that savings institutions pay to depositors. It is a trailing index based on the previous month’s cost. The COFI tends to move a little slower than some of the other indices. That can be good when interest rates rise.

At this point in time, the COFI is 0.599 percent, which is almost its all-time low of 0.598 percent. The highest value in the last 20 years was 5.617 percent. The median value is 2.308 percent.

With a margin of 3.0 percent (COFI loans usually have higher margins), your interest rate today would be 3.599 percent. If the index hits its highest level in 20 years, your rate could rise to 8.617 percent. If the COFI levels out around its median, you’ll pay 5.308 percent.

LIBOR

The London Interbank Offered Rate for Six Months is one of the most widely used indices. It reflects the rate that European banks charge each other for six-month loans.

There are also LIBOR indices for one month, three months and one year. So make sure that the LIBOR loans you are comparing actually have the same index.

The 6-month LIBOR is currently 1.34 percent. The lowest value in the last 20 years was 0.323 percent. The highest value was 7.064 percent and the median value 1.903 percent. With a margin of 2.5 percent, your best-case rate would be 2.323 percent, your worst-case rate would be 9.564 percent, and the median would be 4.403 percent.

Note that the LIBOR range is wider than any of the other indices, so your credit could be more volatile – watch out for the highs and lows that may narrow this range down a bit.

MTA

The Monthly Treasury Average, also known as the 12 Month Moving Average Treasury (MAT) index, is a close relative of the CMT. In fact, you calculate it by taking the average of the last 12 values ​​of the monthly CMT.

Since it is an average, this index tends to move more slowly. This can be good in an environment of rising interest rates and less so when interest rates are falling.

The current value for this index is 0.638 percent. If you have a margin of 2.5 percent and your interest rate would adjust as of the time of this writing, your new interest rate will be 3.138 percent, subject to the upper and lower limits of the loan. The lowest value for this index over the past 20 years is 0.113 percent (your interest rate would be 2.613 percent, depending on the credit floor).

The highest is 6.128 percent (your interest rate would be 8.628 percent, subject to the loan caps). The median value of this index is 1.872 percent (4.372 percent with a 2.5 percent margin).

How to buy an ARM

When comparing ARM loans, consider several factors:

• What is the start rate?
• What are the loan costs?
• How long is the rate fixed?
• How long do you want to have the loan?
• What is the index?
• What is the margin?
• Where would the course most likely move in the future?

Most people who choose ARMs try to adjust the fixed income period to match when they want to own the home. You don’t really plan on getting this loan once it starts rolling back.

If that is you, your main concern is getting the best price for what you want to pay for.

However, you may keep the house longer than expected and future movements in the interest rate should be taken into account. Know where your payment could go in the sixth year of a 5/1 ARM in case you actually have to pay it.

In this case, a loan with a cap of two percent of the initial adjustment could be a much better deal than one with a cap of three percent of the initial adjustment.

What are the current mortgage rates?

Current ARM prices are a bargain, with some indices very close to their all-time lows. In a rising interest rate environment, however, it is important to choose an ARM that offers a certain degree of future security in addition to a low interest rate today.

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