ARM Index
Definition and meaning of ARM Index in real estate.
An ARM index is a publicly published benchmark interest rate that lenders use to calculate adjustments on adjustable-rate mortgages (ARMs). It reflects the general cost of borrowing money in the wider financial market and is not controlled by any single lender.
In more detail
When the interest rate on an adjustable-rate mortgage resets, the lender calculates the new rate by adding a fixed number of percentage points (the margin) to the current value of the chosen ARM index. Common indexes include the Secured Overnight Financing Rate (SOFR) and the Cost of Funds Index (COFI).
Because the index fluctuates based on market conditions, the borrower's monthly mortgage payment will rise or fall accordingly. Lenders must specify the exact index they will use in the loan agreement before closing.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Common Examples | SOFR (Secured Overnight Financing Rate), COFI (Cost of Funds Index) |
| Rate Calculation | Index Rate plus the margin equals the fully indexed interest rate |
| Frequency of Change | Daily, monthly, or semi-annually depending on the specific index |
A homebuyer has an adjustable-rate mortgage with an interest rate tied to a published index, and when the index increases due to market conditions, the buyer's monthly mortgage payment increases at the next adjustment period.
Frequently asked questions
Can a lender change which ARM index is used during the life of the loan?
No, the lender must use the index specified in the original loan contract, unless that index becomes permanently unavailable, in which case a comparable replacement is selected.
How does the ARM index affect my monthly payment?
If the index rate rises, your mortgage interest rate and monthly payment will increase. If the index rate falls, your interest rate and monthly payment will typically decrease.
Is the index rate the same as the mortgage interest rate?
No, the index rate is only the benchmark base, and the lender adds a fixed margin to this base rate to determine your actual mortgage interest rate.