DEFINITION of 'ARM Index'

The benchmark interest rate to which an adjustable rate mortgage is tied. An adjustable rate mortgage's interest rate consists of an index value plus a margin. The index underlying the adjustable rate mortgage is variable, while the margin is constant. There are several popular indexes used for different types of adjustable rate mortgages.

This is also referred to as the "fully indexed interest rate".

BREAKING DOWN 'ARM Index'

The index to which an adjustable rate mortgage is tied can make a difference over the life of the mortgage. For example, one popular mortgage index is the MTA index. It is a moving average calculation, and therefore has a "lag effect". If interest rates are expected to rise, a mortgage tied to the MTA index might be more economical than a mortgage tied to an index without a moving average calculation, such as the one-month LIBOR index. However, a borrower should consider more than the index when choosing an adjustable rate mortgage. Many other variables, such as the margin and the interest rate cap structure, are important considerations.

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