Understanding How Mortgage Rates Are Tied to What Index

Mortgage rates are influenced by a specific index, which can fluctuate over time. This index is known as the 10-year Treasury note.

The 10-year Treasury note is a type of government bond with a 10-year maturity period. It's a benchmark for short-term interest rates and is widely used as a reference point for mortgage rates.

The value of the 10-year Treasury note can change daily, causing mortgage rates to adjust accordingly. This can result in significant changes to a borrower's monthly payments.

The 10-year Treasury note is influenced by various economic factors, including inflation, employment rates, and GDP growth.

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ARMs are tied to an index rate, which is a benchmark rate tied to a specific market value like the Federal Reserve's prime rate or the Secured Overnight Financing Rate (SOFR).

The most common index rates used by lenders are rates on one-, three-, or five-year Treasury securities, or the national or regional average cost of funds to savings and loan associations.

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The lender also specifies a margin amount, which is added to the index number to determine the new actual rate during adjustment periods.

Here's a breakdown of the basic features of ARMs:

Some lenders may use different index rates and margins, but the chosen index and margin amount should be made clear in your mortgage agreement.

A mortgage index is a benchmark rate tied to a specific market value, such as the Federal Reserve's prime rate or the Secured Overnight Financing Rate (SOFR). This rate is used to determine the interest rate on an adjustable-rate mortgage.

Some common mortgage indices include the 11th District Cost of Funds Index (COFI), the London Interbank Offered Rate (LIBOR), and the 12-month Treasury Average Index (MTA). These indices can be applied in three ways: directly, on a rate plus margin basis, or based on index movement.

Here are some common mortgage indices:

The choice of mortgage index can impact the interest rate on your mortgage, so it's essential to understand how it works and how it may affect your loan.

Mortgage rates are often tied to the 10-Year Treasury rate, a benchmark that reflects the yield on government bonds with 10-year maturities.

The 10-Year Treasury rate is influenced by the Federal Reserve's monetary policy decisions, which can impact the overall economy and, in turn, mortgage rates.

In periods of economic uncertainty, the 10-Year Treasury rate tends to rise, and mortgage rates often follow suit.

The chart below shows the historical relationship between the 30-year fixed mortgage rate and the 10-Year Treasury rate, illustrating how closely they are linked.

A 1% increase in the 10-Year Treasury rate can result in a 0.5% to 1% increase in mortgage rates, affecting the monthly mortgage payment for borrowers.

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An index is a benchmark rate tied to a specific market value, such as the Federal Reserve's prime rate or the Secured Overnight Financing Rate (SOFR). The most common indices used in mortgage lending are the London Interbank Offered Rate (LIBOR), the 11th District Cost of Funds Index (COFI), and the 12-month Treasury Average Index (MTA).

The index may be applied in one of three ways: directly, on a rate plus margin basis, or based on index movement. A directly applied index means that the interest rate changes exactly with the index, while a rate plus margin basis means that the interest rate will equal the underlying index plus a margin.

The lender specifies a "margin amount" in the mortgage contract, which is added to the index number to determine the new actual rate during adjustment periods. Different mortgage lenders may use different index rates and margins, but the chosen index and margin amount should be made clear in your mortgage agreement.

The most common indices used in mortgage lending are:

In some countries, banks may publish a prime lending rate which is used as the index. The index may be applied in one of three ways: directly, on a rate plus margin basis, or based on index movement.

Mortgage rates are regulated by laws that govern how they can be adjusted. Section 251(a) of the National Housing Act authorizes HUD to insure Adjustable Rate Mortgages (ARMs) and specifies that interest rate adjustments must correspond to a particular index.

Adjustments to interest rates for ARMs are tied to a specified interest rate index approved by the Secretary of HUD. This information must be easily accessible to borrowers from widely available published sources.

The Federal Housing Administration (FHA) also has regulations for Home Equity Conversion Mortgages (HECMs), which are a type of ARM. Section 255(d) of the NHA authorizes FHA to insure variable rate HECMs and imposes additional eligibility requirements.

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The statutory provisions that govern mortgage regulations are found in the National Housing Act. Section 251(a) of the NHA authorizes HUD to insure Adjustable Rate Mortgages (ARMs).

Adjustments to the interest rate on ARMs are tied to a specified interest rate index, which must be readily accessible to mortgagors from generally available published sources. This ensures that homeowners can easily track and understand their mortgage rates.

Section 255(d) of the NHA authorizes the Federal Housing Administration (FHA) to insure variable rate Home Equity Conversion Mortgages (HECMs).

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Many experts support the proposed rule to strengthen mortgage regulations, citing the need to prevent another housing market crash like the one in 2008.

The Consumer Financial Protection Bureau (CFPB) is a key supporter of the proposed rule, which aims to improve the quality of mortgage loans and prevent predatory lending practices.

Industry experts argue that the proposed rule will help to reduce the risk of mortgage defaults and foreclosures, which can have devastating effects on families and communities.

The proposed rule would also help to ensure that lenders accurately assess a borrower's ability to repay a mortgage, which is a key factor in preventing defaults and foreclosures.

Some critics argue that the proposed rule may increase the cost of borrowing for some consumers, but supporters argue that the benefits of the rule far outweigh any potential costs.

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The Lifetime Adjustment Cap for HECMs is a crucial aspect of these mortgages. It's a limit on how much the interest rate can change over the life of the loan.

A five percentage point cap was initially proposed for monthly HECM ARMs, but it's been revised to a more generous cap. The maximum lifetime adjustment cap for monthly HECM mortgages will now be set at no more than ten percentage points in either direction from the initial mortgage interest rate.

HUD has the flexibility to adjust this cap in the future, and they'll make any changes through notice.

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On October 19, 2022, HUD published a proposed rule to amend 24 CFR parts 203 and 206.

The proposed rule includes three main changes. First, HUD wants to stop using LIBOR and start using a spread-adjusted SOFR index for certain mortgage loans.

HUD also wants to update the rules for Home Equity Conversion Mortgage (HECM) Adjustable Rate Mortgages (ARMs) to match changes already made for new originations.

The Secretary will publish additional requirements for transitioning existing LIBOR-based ARMs to SOFR, which will address technical issues and new developments.

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HUD wants to clarify the rules for Monthly Adjustable Interest Rate HECMs to match those for annual adjustments.

A five percentage point lifetime cap is proposed on the adjustment of the HECM monthly ARM interest rate, which is similar to caps used for annual interest rate HECMs and forward ARMs.

In 1989, the Home Equity Conversion Mortgage program rule provided for ARMs with both capped and uncapped interest rate adjustments.

The HECM rule retained the five percentage point life-of-mortgage limit on interest rate increases and decreases in § 203.49, but increased the annual limit on rate increases and decreases from 1 percentage point to 2 percentage points.

For capped HECM ARMs, the interest rate cap structure is the same as provided in forward mortgages under § 203.49(a), (b), (d), and (f), except that under § 203.49(d), the reference to first debt service payment means the closing in the HECM ARM context.

Section 206.21(b)(1) applies the LIBOR and CMT index options in the same manner as forward ARMs at § 203.49(b) for both the capped and uncapped options.

On March 11, 2021, in Mortgagee Letter 2021-08, HUD removed LIBOR as an approved index and approved the SOFR index for annually adjustable HECM ARMs closed on or after May 3, 2021.

A mortgagee may set rates using CMT or SOFR for annually adjustable HECM ARMs and CMT only for monthly adjustable HECM ARMs.

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In 1989, the Home Equity Conversion Mortgage program rule provided for ARMs with both capped and uncapped interest rate adjustments.

The HECM rule retained the five percentage point life-of-mortgage limit on interest rate increases and decreases, but increased the annual limit on rate increases and decreases from 1 percentage point to 2 percentage points.

For capped HECM ARMs, the interest rate cap structure is the same as provided in forward mortgages, except that the reference to first debt service payment means the closing in the HECM ARM context.

The uncapped option at § 206.21(b)(2) includes options to adjust based on the one-month CMT or one-month LIBOR index.

On March 11, 2021, HUD removed LIBOR as an approved index and approved the SOFR index for annually adjustable HECM ARMs closed on or after May 3, 2021.

A mortgagee may set rates using CMT or SOFR for annually adjustable HECM ARMs and CMT only for monthly adjustable HECM ARMs.

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