How does an index work?
You may have wondered why a loan index keeps on fluctuation and goes up. Before saying anything about loan indexes, it should be understood that these indexes are entirely dependent on the market and keep on changing as the market fluctuates. Lenders tend to use various indexes as a base rate for mortgage loans. After this, a certain number of percentage points (margin) are usually calculated, which remains set for the entire loan period. The percentage points are then added to the index to establish the interest rate, which finally is levied on you.

The One-Year CMT (Constant Maturity Treasuries) Index
CMT is an index that is published by the Federal Reserve Board. The CMT is calculated on the monthly average yield of a range of Treasury securities, all adjusted to the equivalent of a one-year maturity. Importantly, yields on Treasury securities are determined by the U.S. Treasury from the daily yield curve, which is again based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.

The One-Year MTA
The one-year MTA index is calculated by averaging the monthly one-year treasury adjusted to constant maturity for the previous 12 months. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve, which, in turn, is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.

The LIBOR Rate
The LIBOR rate stands for London Inter Bank Offer Rate. LIBOR is the rate of interest at which banks lend money to one another in the wholesale money markets in London. The advantage of LIBOR is that it is a standard financial index which can be easily found in the Wall Street Journal.

The 11th District Cost of Funds index (COFI)
COFI is the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts and shows the ‘cost of funds’ for the prior month. COFI covers the states of Arizona, California, and Nevada, and is published on the last day of each month.  

The Prime Rate
The prime rate is the most widely quoted measure of the prime rate, which is the short term lending rate at which banks will lend money to their most-favored customers. The Prime Rate of interest is typically used for equity lines of credit and is shown in the Wall Street Journal. This rate is calculated by surveying 30 largest banks and is modified when three-quarters of them (23) change. This change stands effective from the day the Journal publishes the new rate.

What Index Does Interest Rates typically follow?
Which index your loan will account depends on the market, time, and features. While some Interest Only loans are based on the LIBOR index, some rates are also tied to the one-year CMT or the MTA varying averages of the one year US Treasury. However to get the accurate information, we suggest you speak to one of our experts.