Section 7 _Most Common
Indexes (Indices):
THE
6-MONTH CERTIFICATE OF DEPOSIT (CD) ARM - This index has
a maximum interest rate adjustment every six months. The 6-month
CD index is generally considered quick to react to changing market
conditions.
THE
1-YEAR TREASURY SPOT ARM - This index has a maximum interest
rate adjustment of 2% every 12 months. This index generally reacts
more slowly than the CD index, but more quickly than the Treasury
Average index.
THE
6-MONTH TREASURY AVERAGE ARM - This index carries a maximum
interest rate adjustment of 1% every six months. The Treasury
Average index generally reacts more slowly in fluctuating markets
so adjustments in the ARM interest rate will lag behind some other
market indicators.
THE 12-MONTH
TREASURY AVERAGE ARM - This index has a maximum interest
rate adjustment of 2% every 12 months and a life cap of 6% over
the start rate. The Treasury Average index generally reacts more
slowly in fluctuating markets so adjustments in the ARM interest
rate will lag behind some other market indicators.
LIBOR
- This index (London Interbank Offered Rate) is calculated on
dollar-denominated deposits (Eurodollars) traded between banks
in London. The index carries 1-month, 3-month and 12-month quotes.
A Eurodollar is a dollar deposited in a bank in a country where
the currency is not the dollar. For over 40 years the Eurodollar
has been a major component of the international financial market
with London being the center of this market.
The LIBOR, which is quoted daily in the Wall
Street Journal, is an average of rates quoted from five major
banks including Bank of America, Barclays, Bank of Tokyo, Deutsche
Bank and the Swiss Bank. The most common LIBOR quote for mortgages
is the 6-month quote.
The LIBOR's cost of money is a widely monitored
international interest rate indicator. This index is currently
being used by both Fannie Mae and Freddie Mac on the mortgages
that they purchase. The LIBOR compares most closely to the 1-Year
Treasury Security index.
We have monitored the LIBOR for many years and
advise certain clients of low-rate alternatives in this mortgage
type called "Interest-Free" loans. See Dynamic
Lowest Payment INTEREST-ONLY Program!
COST
OF FUNDS (COFI) INDEX - The Federal Home Loan Bank's
11th District Cost of Funds Index is more prevalent in the West
and the 1-Year Treasury Security is more prevalent in the East.
The 11th District, which is comprised of savings institutions
in Arizona, California and Nevada, has been publishing the Index's
monthly weighted average since 1981 through the Federal Home Loan
Bank of San Francisco.
Most people who use and follow the COFI Index
don't understand exactly how it's calculated or what it represents,
how it moves in the marketplace, and what factors affect it. The
funds used as a basis for the index calculation are the liabilities
at the District's savings institutions including money on deposit,
money borrowed (advances) from the Federal Home Loan Bank and
other money borrowed. The interest paid on these funds is "Cost
of Funds" in the 11th District Cost of Funds.
The ratio of the dollar amount paid in interest
during the month to the average dollar amount of the funds for
that month constitutes the weighted average cost of funds ratio
for that month. The average cost of funds is said to be weighted
because the three kinds of funds and their costs are added together
before a ratio is computed rather than calculating averages individually
for the three sources and taking a simple average of the three
ratios. This gives the greatest weight to the interest paid on
deposits, and explains the delayed reaction of the index to rising
fixed-rate mortgages.
Got that? Well, don't
worry! You just have to know that the COFI Index, which was initiated
by an act of the U. S. Congress, is the most conservative of the
ARM indexes. It is known as the "Mom and Pop" Index
and lags behind all other indexes as a slowly moving index in
relationship to market change.
