Anyone thinking of purchasing an adjustable rate mortgage (ARM) ought to be aware of the Treasury index. The fluctuation in the mortgage interest rate defined by this type of mortgage financing is determined primarily by this fiduciary index. The Treasury index is a fluctuating compilation of interest rates — commonly known as yield — resulting from the auction of Treasury bills (T-Bills) and Treasury securities. In addition, the index is based on the Treasury yield curve, also known as Constant Maturity Treasury (CMT) rates which formulate the various yields on securities to their time of maturity. The Treasury index is, by its very nature, subject to the vicissitudes of many national and international financial markets.
Treasury securities essentially consist of: 1) T-Bills, which, as noted, are also a stand-alone integer of the Treasury index, 2) Treasury notes, 3) savings bonds and, 4) Treasury inflation protected securities (TIPS).
The Treasury yield curve illustrates the average daily yield resulting from the relationship between government calculated interest rates and maturity of market debt. The yield curve is adjusted day-to-day from composite quotes of the Federal Reserve Bank of New York.
Adjustable rate mortgages are offered and accepted by lenders (mortgagees) and borrowers (mortgagers) mainly because of the see-saw nature of the Treasury index. These mortgage plans feature the lowest interest rates and closing fees offered by a mortgage lender which obviously attracts borrowers. This initial lower cost, however comes with the risk of a significant rise in rates over the term of the mortgage loan.
As a rule, ARM's offer loan adjustment periods of one month, six months, one year, three years and five years, although so-called "hybrid" ARM’s are also available. Lenders are able to reduce their risk of suffering a lower rate of return on a given mortgage loan as well as increase their ability to finance, at least for the short term, their sources of loan funding. The schedule of interest rate adjustments is set by the lender at the time of the closing of the mortgage based on the Treasury index at the agreed-to dates of adjustment.
Borrowers planning to take advantage of falling mortgage interest rates resulting from progressively higher yields of the Treasury index are well advised to act quickly in scheduling the closing on their loan. A higher yielding Treasury index is, obviously, extremely beneficial to the adjustable rate mortgager since the lender, by integrating the higher yield into its funding sources, decreases the need to support those sources through a hike in mortgage rates. Expediting the loan process is especially advantageous if mortgagers anticipate either re-mortgaging or otherwise terminating their loan in a shorter period of time than that usually offered with fixed-rate mortgages.
