How is an Index and Margin Used in an Adjustable Rate Mortgage (ARM)?

An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally, the interest rate that a borrower pays, is a combination of the index rate plus a pre-signed margin. Three commonly used indices are the One-Year Treasury, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI) and the London InterBank Offering Rate (LIBOR).

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