Index
Definition and meaning of Index in real estate.
An index is a benchmark interest rate that lenders use to calculate the adjustable rate on an adjustable-rate mortgage. This rate changes over time based on broader economic conditions, reflecting the cost of borrowing in the national or global financial markets.
In more detail
When a borrower takes out an adjustable-rate mortgage, the interest rate is tied to a specific index, such as the Secured Overnight Financing Rate or the Cost of Funds Index. The lender adds a set number of percentage points, known as the margin, to the index rate to determine the borrower's total interest rate.
If the index rate rises, the borrower's monthly mortgage payment will increase when the adjustment period arrives. Conversely, if the index falls, the mortgage payment may decrease. Borrowers should ask their lenders which index their loan will use, as some indices fluctuate more rapidly than others.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Common examples | Secured Overnight Financing Rate, Treasury Yield index |
| Applies to | Adjustable-rate mortgages and home equity lines of credit |
| Watch out for | Rapidly rising index rates that lead to higher monthly mortgage payments |
A borrower has an adjustable mortgage with a margin of two percent, meaning if the underlying index rate is at five percent when the loan adjusts, their new interest rate will be seven percent.
Frequently asked questions
What is the difference between the index and the margin?
The index is a variable market benchmark rate, while the margin is a fixed percentage added by the lender that does not change.
How often does a mortgage index rate change?
The index rate changes daily or weekly, but a borrower's interest rate only adjusts at pre-determined intervals specified in the loan note.