Index
A benchmark measurement used to track changes in economic indicators, commonly referenced in adjustable-rate mortgages (ARMs) to determine interest rate adjustments. Popular indices include the London Interbank Offered Rate (LIBOR), Treasury rates, or the Cost of Funds Index (COFI).
Example
“The adjustable-rate mortgage was tied to the LIBOR index, meaning the interest rate would fluctuate based on this benchmark's movement.”
Memory Tip
Index = 'In-dex' like your index finger points to important information - it points to economic trends.
Why It Matters
The choice of index directly affects how much borrowers will pay when their adjustable-rate mortgage adjusts, making it crucial to understand which index your ARM follows. Different indices have varying volatility and historical performance patterns.
Common Misconception
Borrowers often think they can choose their ARM's index, but lenders typically predetermine which index will be used for rate adjustments.
In Practice
A homeowner with a 5/1 ARM tied to the 1-year Treasury index will see their interest rate adjust annually after the initial five-year fixed period, with the new rate calculated as the current Treasury rate plus their loan's margin (typically 2-3%).
Etymology
From Latin 'index' meaning 'pointer' or 'indicator,' originally referring to the forefinger used to point at things, now pointing to economic trends and measurements.
Common Misspellings
Compare today's mortgage rates
More in real estate
Other real estate terms you should know
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.