What Is Current Index Value?
The term current index value refers to the most current value for the underlying indexed rate in a variable rate loan. Variable rate loans rely on the indexed rate and a margin to calculate the fully indexed rate that a borrower is required to pay. This value should reflect general market conditions as well as changes based on those that take place in the market.
Current index value reflects general market conditions and changes based on the market.
Understanding Current Index Value
Current index values are used by lenders to calculate the variable rate loan products. The rate borrowers pay on these loans is called the fully indexed rate. It is a function of both an indexed rate and a margin. Lenders may offer a variety of variable rate loan products with fully indexed rates that change at differing reset times.
Indexed rates are set by the lender and can be based on various indexes including:
- a lender’s prime rate
- the London Interbank Offered Rate (LIBOR)
- the cost of funds index (COFI)
- the cost of savings index (COSI)
- various U.S. Treasuries
The lender decides the indexed rate component and outlines the terms in the loan contract. The chosen index, however, does not change after closing.
The loan rate on a variable rate loan is calculated by adding the indexed rate and the borrower’s margin. In a variable rate product’s loan underwriting process, the underwriter assigns the borrower a margin based on their credit profile or credit rating. The borrower is required to pay the fully indexed rate, which changes with changes in the underlying indexed rate. For many variable rate credit products, the variable rate is volatile. This means it can change at any time. Thus, when the current index value changes, the borrower’s rate changes.
- A current index value is the most current value for the underlying indexed rate in a variable rate loan.
- Variable rate loans rely on the indexed rate and a margin to calculate the fully indexed rate borrowers must pay.
- Indexed rates may be based on various indexes such as a lender's prime rate, LIBOR, or U.S. Treasuries.
Adjustable-rate mortgages (ARMs) incorporate both fixed and variable interest.The London Interbank Offered Rate (LIBOR) is a common index used as the variable rate in mortgages. LOBOR will cease to exist at the end of 2021. Borrowers who take out ARMs pay a fixed rate for the first few years up until a specified reset date occurs.
This fixed-rate is usually applicable for the first five years of the loan, after which the rate resets on an annual basis. This kind of loan is known as a 5/1 hybrid mortgage. Borrowers are charged interest at a variable rate at the reset date and every applicable period after that. The variable rate in an adjustable-rate mortgage is calculated in the same way as standard variable rate products. The borrower pays an underlying indexed rate plus the margin.
In an adjustable-rate mortgage, the variable rate can be volatile, changing every time the underlying current index value changes or whenever the variable rate can be scheduled. With a scheduled variable rate, borrowers pay a fully indexed rate that is reset at scheduled times. Most adjustable-rate mortgages with a scheduled reset date will reset every 12 months. If the variable rate is based on a schedule, the borrower’s interest rate will change to the current index value plus the borrower’s margin on that specific date and the fully indexed rate will remain unchanged until the next reset date.