Definition
The index is the published interest rate benchmark lenders use for ARM rate adjustments. Common indices include SOFR, CMT, or COFI. Different lenders use different indices, and the index you get matters—some indices historically favor borrowers more than others.
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Common ARM indices include SOFR (Secure Overnight Financing Rate), the Constant Maturity Treasury (CMT), or the 11th District Cost of Funds Index (COFI). The index changes periodically based on market conditions. Different lenders may use different indices, so borrowers should compare them when shopping for ARMs.
Pro Tip
When shopping for ARMs, compare the indices used by different lenders; some indices are more favorable than others historically.
Example
An ARM uses the SOFR index. At the rate adjustment, SOFR is 5.0%, the margin is 2.25%, so the new rate becomes 7.25%.