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Adjustable-Rate Loans – When you obtain an ARM, two main factors determine the rate you pay: the index and the margin. The index is a rate set by market forces and the margin is a number that, when added to the index, determines your interest rate.
There are several popular indexes. The prime rate is the interest rate charged by banks to their most creditworthy customers. The prime rate does not change on a regular basis but almost always changes after the Federal Reserve Board changes short-term interest rates.
The Libor rate is based on rates that contributor banks in London offer each other for inter-bank deposits. There are several Libor rates used for mortgage loans: the one-month Libor, the six-month Libor and the one-year Libor.
The 12 Month Treasury Average index (MTA) – This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. This index is calculated by averaging the previous 12 rates of the 1 Year CMT. Because the index is an “averaging” index the rate moves up and down more slowly than the Prime or Libor indexes.
The 11th District Cost of Funds Index is the weighted average of the cost of borrowings to member banking institutions of the Federal Home Loan Bank of San Francisco. The index rate tends to lag market interest rate adjustments and is relatively stable because institutions borrow money for varying terms and do not pay market rates for all of their funds.
Several common adjustable-rate loans are described below:
Fixed-Rate Loans – These loans come in loan terms up to 50 years. The most common loans are loans fixed for 15, 20 or 30 years.
Interest-Only Loans – There are a variety of interest-only loans. Oftentimes Interest-Only loans are “Hybrid Loans” (see above) because there is an introductory period of up to 15 years where you can elect to make an interest-only payment and afterwards the loan becomes adjustable. We offer loans where the rate stays fixed for 30 years with an interest-only option for the first 10 or 15 years.
Government Loans – These are loans backed by either the State of California (CALHFA loans) or the US Government (FHA and VA loans). See First-Time Home Buyer Loans.