Pay Option ARM Loans

What is an index?

An index is an independent, published economic indicator. There is a wide variety of commonly used interest rate indices including the 12-Month Treasury Average Index (12-MTA), the 11th District Cost Of Funds Index (COFI) and the 1- Year Constant Maturity Index (CMT). Lenders use indices to establish the interest rate for an adjustable rate mortgage. Additionally, ARM rates follow the movement of these indices. The lender adds a specified number of percentage points, called a margin, to the index to establish the actual ARM interest rate.

What is the 12-MTA?

The 12-Month Treasury Average Index (12-MTA) is based on the average annual yields on U.S. Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve. The 12 months average is determined by adding together the annual yields for the most recently available 12 months and dividing by 12.

Stability: The 12-MTA Advantage

The 12-MTA Index does not move up or down as rapidly as other market interest rates because the 12-MTA is an average of annual yields on U.S. Treasury Securities over a 12 month period. As a result:

• Higher yields are offset by lower yields on a monthly basis throughout the year.
• It creates an index which is far less volatile than other pur-rate indices
• Interest rate increases take longer to affect the 12-month MTA than other ARM indices.

Index Comparison Graph of Major ARM Indices

The following chart compares the movement of the 12-MTA Index to other popular indices. Historically, those indices may fall faster when interest rates drop, but they also climb more quickly when rates increase. Generally, the 12-MTA Index will rise and fall more gradually than the other interest rate indices.

12-MTA

(12 month Treasury Average)

The 12-MTA Index is the 12-month average of the annual yields on actively traded U.S. Treasury Securities adjusted to constant maturity of one year as published by the Federal Reserve Board. The 12-month average is determined by adding together the annual yields for the most recently available 12 months and dividing by 12. This process creates an index that is far less volatile than other adjusted-rate indices.

COFI

(11th District Cost Of Funds Index)
The monthly weighted average cost of deposits and borrowings for savings institutions in the Federal Home Loan Bank's 11th District, as made available by the Federal Home Loan Bank of San Francisco.

LIBOR

6 -Month London Interbank Offered Rate)
The LIBOR index is based on the average of inter-bank offered rates for one-year U.S. dollar-denominated deposits in the London market, as published in The Wall Street Journal.

CMT

(1-Year Constant Maturity Treasury Index)
The 1-Year CMT is the average yield of all Treasury Securities having one year remaining until maturity. This index is calculated weekly. It's made available by the Federal Reserve.

Prime Rate

This base rate on corporate loans posted by at least 75% of the nation's 30 largest banks.