Adjustable-rate mortgage indexes explained

Constant-maturity Treasury, or CMT, indexes: These indexes follow the weekly or monthly fluctuations in the yields for one-year Treasury bills. The rates on CMT-indexed ARMs move up and down rather quickly. Most CMT-indexed mortgages are adjusted once a year.

CMT-indexed loans are among the most popular ARMs. Hybrid ARMs -- home loans that have a fixed rate for the first few years, then adjust annually -- usually turn into CMT-indexed mortgages when they enter their adjustment periods.

If you're paying attention, you might have noticed that CMT-indexed mortgages are based on a weekly or monthly average and adjust once a year, while MAT-indexed mortgages are based on an annual average and adjust every month. It's one of the quirks of the mortgage business.

Mortgage bankers say it's important that a borrower understand ARM indexes. But there are other things to consider: the margin, the caps on how high the rate can go and other features.

Some loan programs give you three or four choices for each month's payment: You might have the option of making a "minimum payment" that might not even cover the interest accrued in the past month (the aforementioned negative amortization), an interest-only payment, a fully amortizing payment or a full payment plus some extra to be applied to principal.

Other features to look for include the ability of a home's future buyer to assume the mortgage and the capability to modify the loan -- to switch to another index without having to go through an expensive refinance.


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