How to Determine the Index Value on a Home Loan
The index on a home loan, or mortgage, is determined at loan close. Mortgages that are tied to indexes are adjustable rate mortgages. The rates on these loans can fluctuate based on the index changes to which the mortgage is tied. Knowing how to find the index on your loan is essential to financial health.
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Instructions
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Determining Index Value
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Confirm that your mortgage is an adjustable rate mortgage. Conventional loans (those with a fixed rate and fixed term) need not be connected to an index, as the rate determined at closing is permanent for as long as the mortgage remains active. Look at your mortgage loan agreement. If you see the word "adjustable" on any documents, you may have an adjustable rate mortgage. Contact your lender (using your mortgage statement) to be sure.
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Find the margin and index disclosures on your paperwork. All adjustable rate loans have an interest and a margin. The margin is a number that will remain constant. The index is the number determined by economic conditions and may fluctuate monthly. These terms will be on the loan agreement and any riders.
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Use the following list to find your index. Some common indexes are: the 6-month LIBOR (London Interbank Offered Rate), prime rate, 12-month T-bill (Treasury bill), and the 1-year constant maturity treasury (CMT). Look for these words in your loan agreement and on any document that has the word "Rider" in the title. Many adjustable rate mortgages are tied to the LIBOR.
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Find the value of your particular mortgage's index. Using either the Internet or a reputable newspaper (the Wall Street Journal or the New York Times), search for the index. For example, if your loan is tied to the LIBOR, go to the website listed in resources and scroll down to the listing for LIBOR. The most recently updated figure is your index. Use the financial section of a newspaper to find an index.
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Calculate your fully indexed mortgage rate. Your index rate is not your mortgage rate; rather, you must add together the margin (the constant rate) to the most updated index rate to get the rate at which your loan will be charged. For example, if your margin is 3.5 percent and your index is 1.45 percent, your true, fully indexed rate is 4.95 percent. Make sure to stay abreast of the changes in your index rate.
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