Understanding how the lender calculates a mortgage interest rate is important when considering a home loan. Lenders use various methods to calculate the amount of interest that’s paid by the homeowner. This article looks at the various methods used by mortgage lenders to calculate mortgage interest rates. Understanding how banks calculate mortgage rates gives the homeowner an edge when looking for the best home mortgage.

Adjustable Rate Mortgage Interest Index

A mortgage rate index is one part of the equation to determine the interest rate for an adjustable rate mortgage (ARM). There are several indexes that a mortgage lender can use. Some of the more common indexes used include:

• London Interbank Offered Rate (LIBOR)
• Constant Maturity Treasury Securities (CMT)
• Cost of Funds Index (COFI)

Historically various indexes tend to rise and fall along with economic conditions, often times following each other relatively close. There are some differences however and there are no guarantees that one index will perform better than another.

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