- The interest rate -- and, by extension, the payment size -- of an adjustable rate mortgage fluctuates constantly throughout the life of the loan. This is because, in nearly all cases, the index to which the loan is linked will fluctuate. All ARMs are not linked to the same index. All indexes, however, are designed to mirror the going interest rate of loans.
- In some cases, a single ARM may not be linked to a single index. Rather, the ARM may be linked to multiple indexes. In such a case, the rates that these indexes measure are averaged out or are entered into a formula that provides a single rate. This means that the payment size of a mortgage may depend on changes in more than one index.
- According to the Mortgage-X Information Service, over 80 percent of ARMS are based on one of three different indexes: the 11th District Cost of Funds Index, the Constant Maturity Treasury index and the London Inter Bank Offering Rate index. However, a number of other indexes also are commonly used. Some of these measure lending rates in general, while others, such as the National Average Contract Mortgage Rate, measure interest rates attached specifically to mortgages.
- Although the rate that a person has on his ARM may fluctuate, the index to which the ARM is attached will generally never change. However, a homeowner considering refinancing should be aware that if he swaps out of his current mortgage for another ARM, his new ARM may not be linked to the same index. Therefore, a new mortgage may fluctuate more or less than his previous mortgage.
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