ARM Indexes
What is an index?
An index is an independent, published economic indicator. There is a
wide variety of commonly used interest rate indices including the 12-Month
Treasury Average Index (12-MTA), the 11th District Cost Of Funds Index (COFI)
and the 1- Year Constant Maturity Index (CMT). Lenders use indices to
establish the interest rate for an adjustable rate mortgage. Additionally,
ARM rates follow the movement of these indices. The lender adds a
specified number of percentage points, called a margin, to the index to
establish the actual ARM interest rate.
What is the 12-MTA?
The 12-Month Treasury Average Index (12-MTA) is based on the average annual
yields on U.S. Treasury Securities adjusted to a constant maturity of one year,
as made available by the Federal Reserve. The 12 months average is
determined by adding together the annual yields for the most recently available
12 months and dividing by 12.
Stability: The 12-MTA Advantage
The 12-MTA Index does not move up or down as rapidly as other market
interest rates because the 12-MTA is an average of annual yields on U.S.
Treasury Securities over a 12 month period. As a result:
 |
Higher yields are offset by lower yields on a monthly basis
throughout the year |
|
It creates an index which is far less volatile than other
pure-rate indices |
|
Interest rate increases take longer to affect the 12-MTA
than other ARM indices |
Index Comparison Graph of Major ARM Indices
The following chart compares the movement of the 12-MTA Index to
other popular indices. Historically, those indices may fall faster
when interest rates drop, but they also climb more quickly when rates increase.
Generally, the 12-MTA Index will rise and fall more gradually than the other
interest rate indices.
12-MTA
(12 Month Treasury Average)
The 12 month moving average of annual yields on actively traded United States
Treasury Securities adjusted to a constant maturity of one year, as made
available by the Federal Reserve and published in its Statistical Release, "H.15
- Selected Interest Rates".
COFI
(11th District Cost Of Funds Index)
The monthly weighted average cost of deposits and borrowings for savings
institutions in the Federal Home Loan Bank's 11th District, as made available by
the Federal Home Loan Bank of San Francisco.
LIBOR
(6 -Month London Interbank Offered Rate)
This is the rate at which deposits of U.S. dollars are traded in London and is
used as a common international interest rate index.
Prime Rate
This base rate on corporate loans posted by at least 75% of the nation's 30
largest banks.
CMT
(1-Year Constant Maturity Treasury Index)
The 1-Year CMT is the average yield of all Treasury Securities having one year
remaining until maturity. This index is calculated weekly. It's made
available by the Federal Reserve and published in its Statistical Release, "H.15
- Selected Interest Rates".
