Treasury Bills as Your Mortgage Index

My mortgage company told me that my mortgage rate is based on the treasury bond rate.  What does this mean and how do I know the rate if I have an adjustable rate mortgage?

2 Answers

For any adjustable rate mortgage (ARM), your rate is determined by 2 factors: the index and the margin.  The margin is a fixed amount and the index is the factor that may change over time.  Most ARMs also have a floor and ceiling limiting the changes in rate to a given range. 

In order to determine how your rate will be affected, you need to refer to the Note or Adjustable Rate Rider that you signed at closing.  Either of these forms will tell you what your index and margins are and what source will be used to determine the index value.  They will also tell you how often the index is reviewed to determine if your rate will adjust.   

If you do not have a copy of your note, I would encourage you to contact the company servicing your mortgage to determine how your mortgage is structured.

Let's start in reverse. You can find out if you have an adjustable rate mortgage (ARM) by either calling your lender or pulling out your copies of your loan documents. They will contain an addendum to your mortgage called an ARM Rider, spelling out the adjustable terms of your ARM. You can also look for your note, which will typically be titled Adjustable Rate Note, and also contain the information about you need about your loan.

If you have an ARM, the components you need to know are as follows:

1.) Initial fixed term of the loan. How long is your initial rate fixed before adjustment.

2.) What index your loan uses. Each ARM is made of up 2 components. An Index (a variable index like Prime Rate, LIBOR, or a T-bill), and a margin.

3.) Your margin. This is simply a percentage added on to the index to obtain your new interest rate.

4.) Your change date. This will be the date that your new payment will be due. That payment will be based off of the new interest rate on the loan. That rate will be comprised of your Index and your Margin at the time of adjustment.

Lastly, as for what your loan is based on. It will be spelled out in the ARM Rider or the Note. A common index is a 1 year Treasury Bill. This may be what your lender was referencing when they said a treasury bond. A bond is common language used to describe both, however a financial instrument with a maturity of less than 10 years is typically considered a bill. 10 years or greater and it becomes a bond.

Once you find the index in your paperwork, you can search on the internet for the exact amount of that index. For example, if it was a 1 year treasury you could search 'current rate 1 year treasury CMT'. Once you see what that index amount is, you can add your margin and see what your interest rate would be if you were to adjust on that given day. A word of caution, indexes move on a daily basis, so what your rate will adjust to depends on the exact index amount on the day your new rate is calculated.