ARM index? Your adjustable-rate mortgage is tied to a financial index such as SOFR, Treasury bills, or COFI. Your fully indexed rate equals the index value plus a fixed margin set by the lender.
Common ARM Indices
The Secured Overnight Financing Rate (SOFR) is the most common index used today. It replaced LIBOR and reflects the cost of borrowing cash overnight backed by Treasury securities. Treasury bill indices track short-term government bond yields and are another common benchmark. The Cost of Funds Index (COFI) measures the interest expense of financial institutions in the western United States.
Each index behaves differently. SOFR tends to be more volatile than COFI. Treasury bills respond quickly to Federal Reserve policy changes. Understanding which index your ARM uses helps you predict how your rate might change over time.
Index Plus Margin
Your ARM rate is calculated as: Index + Margin = Fully Indexed Rate. So if the SOFR index is at 4.5% and your margin is 2.5%, your fully indexed rate would be 7%. The margin stays fixed for the life of the loan, while the index fluctuates with market conditions.
How the Index Affects Your Payment
When the index moves up or down, your rate adjusts accordingly at the next scheduled adjustment date. If you are concerned about rising rates, look for an ARM tied to a less volatile index or consider a hybrid ARM with a longer fixed period. Patrick Kevin Fagan can help you evaluate which index structure works best for your situation.
