What is an “index”?
An “index” is a financial reference rate on which a lender bases mortgage and other loan rates. Typical indices include the rate of return on 1-, 3- or 5-year U.S. Treasury bills or the monthly average interest rate on loans closed by savings and loan associations. As this rate goes up or down, so too, will your mortgage rate.
Essentially, an index*** is a statistical measure of change in an economy or a securities market. In the case of financial markets, an index is essentially an imaginary portfolio of securities representing a particular market or a portion of it. For people who fundamentally believe that indexes outperform managers over time, we have created the Total Index System (INDEX), utilizing the same investment philosophy as the Total Investment System (FIVEX) but building the mutual fund with index funds and ETFs. Indexes are unmanaged and one cannot invest directly in an index or a portion of it. *** WWW “Index.” 2006. http://investopedia.com/terms/i/index.
An index is used as a measure of economic condition relative to Treasury notes or Treasury bill. Lenders usually use the index rate to adjust changes in an ARM interest rate. Indexes tend to fluctuate up and down according to the change of general interest rates. If the index rate goes up, your interest rate will be higher. If the index rate goes down, your interest rate may go down as well.
