Mortgage and Loan Definitions
ARM Indices Explanations
LIBOR
London Inter Bank Offering Rate is is an average of the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale, or interbank, money market. There are several different LIBOR rates widely used as ARM indexes: 1-, 3-, 6-Month, and 1-Year LIBOR.
PRIME RATE
The Prime Rate is the interest rate charged by North American banks to borrowers who they consider most creditworthy. It varies little among banks, and adjustments are generally made by banks at the same time.
MTA
The Monthly Treasury Average is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. It is calculated by averaging the previous 12 monthly values of the 1-Year CMT.
CMT
The Constant Maturity Treasury indexes are the weekly or monthly average yields on U.S. Treasury securities adjusted to constant maturities. The CMT indexes are volatile and move with the market. They reflect the state of the economy, and respond quickly to economic changes. The most widely used CMT index is the 1-Year CMT. There is also a 1-month CMT, 3-month CMT, 6-month CMT, 2-year CMT, 3-year CMT, 5-year CMT, 7-year CMT, 10-year CMT, and 20-year CMT. The Federal Reserve Board reports the CMT indexes.
T-BILL
Treasury Bill indexes are based on the results of auctions that the U.S. Treasury holds for its Treasury bills, notes and bonds. Treasury bills are issued by the U.S. government and mature in one year or less. The Treasury Bill indexes move with the market and respond quickly to economic changes like the CMT indexes. The 1- Year CMT is commonly called the 1-Year T-Bill although it is not a Treasury Bill. The “true” 1-Year Treasury Bill index is rarely used. The Federal Reserve Board reports the T-Bill indexes.
CODI
The Certificate of Deposit Index is the 12 month average of the monthly average yields on the nationally published 3-Month Certificate of Deposit rates as published by the Federal Reserve Board.
COFI
The Cost of Funds Index is the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada.
COSI
The Cost of Savings Index is the weighted average of the interest rates on the deposit accounts of the subsidiaries of Golden West Financial Corporation that all operate under the name World Savings. World Savings receives money from consumers in the form of deposits and lends money as home or other loans. The interest rates on these deposits are the basis for the COSI index. However, it is not based on actual interest paid, but rather the weighted annualized average of all interest rates in effect on World Savings deposit accounts on the last day of each month.
CD
The Certificate of Deposit indexes are averages of the secondary market interest rates on nationally traded Certificates of Deposit. CDs are usually issued by banks and other financial institutions. They pay a fixed rate of interest for a specific period of time.
Mortgage Terms & Definitions
Fixed Rate Mortgage
A fixed rate mortgage has the same interest rate and monthly payment throughout the term of the mortgage. The payment is calculated to payoff the mortgage balance at the end of the term. The most common terms are 15 year and 30 years.
Fully Amortizing ARM
This is the most common type of ARM. The monthly payment is calculated to payoff the entire mortgage balance at the end of the term. The term is typically 30 years. After any fixed interest rate period has passed, the interest rate and payment adjusts annually. A Fully Amortizing ARM will also have a maximum rate that it will not exceed. This calculator uses a maximum interest rate of 12%. Below is a list of the most common types of Fully Amortizing ARMs.
Interest Only ARM
An Interest Only ARM only requires monthly interest payments. Since you are not paying any principal, as you are with the other two types of mortgages described above, this can lower your monthly payment. However, since your mortgage’s principal balance is not decreased, you will have a balloon payment at the end of the mortgage’s term. Like a Fully Amortizing ARM, an Interest Only ARM will often have a period where the interest rate is fixed, and then it is adjusted annually. An Interest Only ARM will also have a maximum interest rate that it will not exceed. This calculator uses a maximum interest rate of 12%.
Mortgage amount
Expected balance for your mortgage.
Term in years
The number of years over which you will repay this mortgage. The most common mortgage terms are 15 years and 30 years. Please note that for the Interest Only ARM you will have a balloon payment for the entire principal balance at the end of the loan term.
Expected rate change
The annual adjustment you expect in your ARM. The range for this calculator is minus 3% to plus 3%. Use a negative value if you believe interest rates will decrease, a positive value if you believe they will increase.
Interest rate
Annual interest rate for each mortgage type. Typically an ARM will have a lower interest rate than a fixed rate mortgage. The rate of an Interest Only ARM will vary by lender.
Months rate fixed
This is the number of months the rate is fixed for an ARM. During this period the interest rate and the monthly payment will remain fixed. The rate will then adjust annually by the expected rate change.
Interest rate cap
This is the maximum interest rate for this mortgage. The mortgage’s interest rate will never exceed the interest rate cap.
Monthly payment
Monthly principal and interest payment (PI) for the Fixed Rate Mortgage and the Fully Amortizing ARM. This is an interest only payment for an Interest Only ARM.
