Prime Rate – What is it?

John Thomas July 21, 2007 Tags: ARM Loan, HELOC, Home Equity Line of Credit, Prime, Prime Lending Rate, Prime Rate

Prime Rate – What is It?

Prime Rate or Prime Lending Rate is the overnight lending rate that banks charge other banks to lend money. It is based on the Federal Funds Rate. Prime is typically about 3% above the Fed Funds Rate. So if Bank A borrowers money from the Federal Reserve at 1% it will then lend to Bank B at 4%. The 4% rate charged to bank B is the Prime Rate.

Wall Street Journal (WSJ) Prime Rate is a consensus measure of the Prime Lending Rate, and is published in the Wall Street Journal. The Wall Street Journal surveys the large banks and then publishes their consensus “Prime”, or the rate offered to clients who are considered eligible for “prime” financing terms. The Prime Lending Rate will move up or down in lock step with changes made by the Federal Reserve Board to their Fed Funds Rate. The Prime Rate is an important index used by banks to set rates on many consumer loan products, such as credit cards, auto loans, and certain Adjustable Rate Mortgages. When the Prime is rising, variable interest rate loans and credit card rates will soon follow. Keep Reading...

COSI Index & CODI Index – What are they?

John Thomas July 19, 2007 Tags: CODI Index, COSI Index

COSI Index & CODI Index – What are They?

COSI Index
Cost of Savings Index (COSI)

A bank receives money from consumers in the form of deposits and then lends money as home mortgages or other loans. The interest rates in effect on these deposits are the basis for the COSI index. It is not based on actual interest paid, but rather the weighted annualized average of all interest rates in effect on deposit accounts on the last day of each month.

CODI Index

Certificates of Deposit Index (CODI)

Similar to the Cost of Savings Index above, this index is based on an average of the 12 most recent monthly yields on 3-month certificates of deposit (CDs). Keep Reading...

1 Year T-Bill – What is it?

John Thomas July 17, 2007 Tags: 1 Year T-Bill, 1 Year Treasury

1 Year T -Bill what is it?

One-Year/12-Month Constant Maturity Treasury (CMT)

This is an index published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a one-year maturity. The US Treasury determines the yields on these securities by using the “daily yield curve”. The daily yield curve is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market. This index tends to be volatile and responds quickly to changes in economic conditions. Keep Reading...

COFI Index – What is it?

John Thomas July 6, 2007 Tags: COFI Index

Cost of Funds Index (COFI)

This is a monthly cost-of-funds index (COFI) reflecting the weighted-average interest rate paid by a particular Federal Home Loan Bank District savings institution on savings and checking accounts. The 11th District is the one most commonly used, which covers Arizona, California, and Nevada. The COFI index is published on the last day of the month and reflects the cost of funds for the prior month. COFI usually lags behind market interest rates in both up and down markets, which means that loans tied to this index rise and fall more slowly than interest rates in general. Keep Reading...

MTA Index – What is it?

John Thomas July 3, 2007 Tags: MTA Index

MTA
Monthly Treasury Average (1 year MTA)

This index is determined by averaging one-year Treasury bills each month over the prior 12 month time period. This is an index used to set the cost of various variable-rate loans, particularly adjustable-rate mortgages. The use of the 1-Year MTA as a loan index is relatively new. The MTA generally fluctuates more than the 11th District Cost-of-Funds Index (COFI see below), although they both track each other closely.

Note:
The MTA index is often used in what is commonly referred to as “Option ARMs”. This product type can create terrific cash flow and payment stability for your customer in the early years of the loan but requires education on the consequences of the different payment options, such as negative amortization. Keep Reading...

LIBOR Index – What is it?

John Thomas July 2, 2007 Tags: Adjustable Rate Mortgages, ARM Loans, Delaware Adjustable Rate Mortgages, Libor Index, London Inter-Bank Offered Rate

LIBOR Index – What is It?

London Inter-Bank Offered Rate (LIBOR)

LIBOR Index is the rate of interest that member banks of the British Bankers’ Association charge when they lend money to one another in the wholesale money markets in London, somewhat similar to our Fed Funds Rate. In fact, the LIBOR Index tends to closely track the US Fed Funds Rate. LIBOR Index is a standard financial index that is used globally and in US capital markets. The Wall Street Journal publishes the LIBOR index on a daily basis.

In general, changes in the LIBOR Index have tended to be smaller than changes in the Prime Rate. There are several LIBOR maturities much like U.S. Treasuries, but the 1-month and 6 month are the most readily used and available LIBOR indexes for mortgage loans. Although they are becoming increasingly more common in use for consumer loans and ARMs, LIBOR Indices have traditionally been a reference figure for corporate and commercial financial transactions. Keep Reading...

Mortgage Terms