Which index is used to determine interest rates for adjustable rate mortgages?

Which index is used to determine interest rates for adjustable rate mortgages?

• A. LIBOR
• B. COFI
• C. SOFR
• D. Prime Rate

Answer: (B)

The index used to determine interest rates for adjustable-rate mortgages (ARMs) can vary based on the lender and the mortgage product, but one of the commonly referenced indexes is the Cost of Funds Index (COFI). COFI measures the weighted average cost of funds for savings accounts and is used by several lenders as a benchmark for setting the interest rates on ARMs. This index reflects the actual costs faced by banks when they borrow and lend, and since ARMs often adjust based on market trends, COFI is a reliable indicator of prevailing rates. While other indexes like LIBOR (London Interbank Offered Rate), SOFR (Secured Overnight Financing Rate), and the Prime Rate are also associated with interest rates, COFI plays a specific role in the context of adjustable-rate mortgages, making it a suitable choice for this question. It is important to understand the nuances of these different indexes and how they apply to various financial products in order to navigate the mortgage landscape effectively.

The index used to determine interest rates for adjustable-rate mortgages (ARMs) can vary based on the lender and the mortgage product, but one of the commonly referenced indexes is the Cost of Funds Index (COFI). COFI measures the weighted average cost of funds for savings accounts and is used by several lenders as a benchmark for setting the interest rates on ARMs. This index reflects the actual costs faced by banks when they borrow and lend, and since ARMs often adjust based on market trends, COFI is a reliable indicator of prevailing rates.

While other indexes like LIBOR (London Interbank Offered Rate), SOFR (Secured Overnight Financing Rate), and the Prime Rate are also associated with interest rates, COFI plays a specific role in the context of adjustable-rate mortgages, making it a suitable choice for this question. It is important to understand the nuances of these different indexes and how they apply to various financial products in order to navigate the mortgage landscape effectively.