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What is an index and margin?

April 26, 2017index margin

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What is an index and margin?

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An index is an economic indicator that lenders use, in conjunction with the margin, to set the interest rate for an ARM (adjustable rate mortgage). The interest rate that you pay is a combination of the index plus a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR). Example: Rate = 6.00% (margin of 2.75 + index of 3.25). The margin remains the same throughout the life of your loan but the index changes. When your rate is ready to change, typically 1, 3, 5, 7 or 10 years after your 1st payment, your new rate will be determined by adding the set or fixed margin and the current price of the index used with your ARM.