People talk about indices's and margins all the time in the mortgage world. To tell you the truth, a lot of mortgage professionals do not even know what it is, and how it will affect them. So, here is a brief run down of it.
An Index is something that is determined by an outside source that allows us all measure things. Kind of like a compass on a map; it gives us a starting point. The most widely used index is the LIBOR, or London InterBank Offered Rate. This LIBOR is the rate at which one bank will charge another bank to lend them money. It is for banks in London, hence the name, and we use it as our compass. There are other indices's that people use, code named COFI, MTA, or the 1 year Treasury index (used primarily in the America).
Mortgage lenders use this index to create ARM loans, or Adjustable Rate Mortgages. The lender uses that rate, and then adds a 'margin' to it, and that creates the Note Rate. That Note Rate is the rate at which you will be paying back the lender for your loan. When the index goes down, the rate at which you pay your ARM loan goes down (assuming you have passed the 'fixed' portion of your mortgage).
So, INDEX+MARGIN=NOTE RATE.
The Margin never changes, only the Index. When the fed cuts the 1 year Treasury rate, which is what a lot of American ARM loans are tied too, their rate goes down. It is just like a home equity line of credit that adjusts with the Prime rate. Why is this all important? There are stories out of London banks have been manipulating this index, which they should NOT be doing. It appears that regulatory powers in London have noticed this, and have started to put a stop to it, leading to the threat that this rate may go up. If that happens, people that have loans tied to the LIBOR may see their rate go up.
All of this is important because it shows how connected the banking institutions through out the world are ALL connected!
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