The Loan Index Lottery

It turns out that having an adjustable rate loan is not too bad for many borrowers.  Some people are sitting pretty right now.  At this point it all really depends on the loan index to which your loan is tied. 

If your loan is tied to the 1 Year Constant Maturity Treasury (CMT) and about ready to adjust you could be looking at a loan rate in the 3% to 4% range, down about 3% from last year.  This includes loans tied to the 12 Month Treasury Average (12 MTA) which is just an average of the last 12 monthly CMT rates.  The CMT is around 1% and the MTA is around 2% and dropping.  Check out your loan documents and see what margin you should add to your loan index to calculate your rate.  If your margin is in the 2% range you could be in for a very pleasant surprise.  Combine this almost 50% cut in your mortgage interest with an over 50% drop in gasoline prices, you are talking serious savings for some people.

On the other hand, if your loan is tied to LIBOR or the Cost of Funds Index (COFI), you are looking at higher rates than your neighbor with a CMT loan.  The 1 year LIBOR is just under 3% and the COFI is just over 3%.  So if you have one of these indexes and assuming you have a comparable margin to your neighbor’s CMT loan, you could be paying 2% more for your loan.  Your rate may be in the 5% to 6% range.  On the bright side, your rate should be down about 2% from last year corresponding to about a 25% reduction in your mortgage interest.  Nothing to sneeze at.

In hindsight, getting an index tied to Treasury rates seems like a great decision.   Looking forward, in the very near term, the CMT continues to trend down and the MTA will follow.  It’s any body’s guess what the LIBOR will do.  Eventually these indexes will come back to normalcy and track closer to each other.  Looking farther forward, I would guess these loan indexes will be up considerably a few years from now.  The amount of money being printed and poured into the economies around the world seems like a recipe for serious longer term inflation and higher loan rates.

It may be a good time to evaluate your individual situation and see if you can take advantage of the 30 year fixed rate conforming loans at just over 5%.  If you are sitting on a jumbo loan, it’s a bit tougher to figure out.  The jumbo 30 year fixed rates are in the 7% range and the 5 years adjustables are in the mid to high 5% range. 

Below is a graph that shows how the indexes have started to diverge.  If you click on the graph it will take you to other comparison charts.

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Rate Comparison - LIBOR & CMT
Rate Comparison - LIBOR & CMT

1 thought on “The Loan Index Lottery”

  1. These days multiple people choose to apply for loans using Internet. I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Look forward to reading more from you in the future.


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