Interest Rates & Indexes

Interest Rates & Indexes

Last week I discussed the fully indexed rate (interest rate) on an adjustable rate mortgage (ARM).  I explained how the fully indexed rate equals the index that the note is tied to plus the margin that is determined by the lender.  Understanding the interest rate risks involved with an ARM is critical to making the right decision when it comes to choosing a mortgage product.

interest rates property guidingAforementioned, the premiss behind knowing your interest rate on an adjustable rate mortgage is understanding what index it is tied to along with the margin that was determined by the lender.  There are several different indexes to consider.  These indexes are, but not limited to, the London Interbank Offered Rate (LIBOR), the U.S. Treasury which consists of T-bills, T-notes, etc. the Constant Maturity Treasury (CMT) and the Costs of funds index (COFI).

The term structure of interest rates is often referred to as a yield curve.  It shows the relative level of short-term and long-term interest rates at a point in time.  Generally, U.S. government securities (U.S. Treasury) are used to construct yield curves because they are free of default risk and the large number of maturities creates a fairly continuous curve.  The yield curve for government securities changes daily reflecting current competitive conditions in both the money and capital markets, expected inflation, and changes in economic conditions.

Since the U.S. dollar is the world’s international currency, and because the United States has run up huge foreign trade deficits over the past 15 years, there are several trillion dollars floating around the world’s money markets.  London is the center of Eurodollar deposits and a majority of these U.S. dollars can be found there.  Because U.S. companies can borrow dollars from London banks quite easily, large borrowers shop for the lowest interest rate in either London, New York, or any other major money market center.  This means the U.S. prime rate (which is the rate a bank charges its most creditworthy customers) competes with the London Interbank Offered Rate (LIBOR) for loans.  For decades the LIBOR has always been lower than the Prime Rate.

Not sure who to call or where to start? Contact me today for a 100% free no-obligation loan inquiry analysis.

Matt Pell,  Loan Officer
Mortgage Warehouse, LLC
(239) 672-8502 – Direct Line
(239) 344-9223 – Fax
Company NMLS ID – 137154
Individual NMLS ID – 1018529
Better Business Bureau Rating = A+

Posted on September 9, 2013, in Finance and tagged , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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