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Home Loan Check: Know Your Index and Margin

[Oct 3, 2010.]


Whether you have a first mortgage with an adjustable rate or a home equity line of credit in second position, you need to know your index and margin. Keeping track of your index, and knowing your margin, is key to managing your adjustable rate home loan. The index plus the margin is how the interest rate on your home loan is calculated. When you know your index and margin, you can calculate the monthly mortgage payment you will be expected to make.

The index on an home equity line of credit will most likely be Prime Rate. But, read your note carefully to be sure. There are many indices, including: CMT, LIBOR, and COFI. Prime Rate is the most common index used to calculate the interest rate on an home equity loan or home equity line of credit. The index will change. You need to monitor what your index is doing by consulting a business newpaper such as the Wall Street Journal. In many cases, you can find the most current value of your index online.

Prime Rate is very easy to track. It is in the news often. Prime Rate generally tracks 3% over the Fed Funds Rate, which is set by the Federal Reserve. Everytime the Federal Reserve's Federal Open Market Committee (FOMC) meets to decide monetary policy in the US, the decisions are in the news. When the economy needs a boost, the FOMC lowers its Fed Funds Rate. When the economy is heating up too fast, the FOMC can raise the Fed Funds Rate. Prime rate will go up when the FOMC decides to raise the Fed Funds Rate. That will likely be when the economy looks like it is growing too quickly.

For now, economic growth has been slow. The FOMC lowered the Fed Funds rate to nearly zero ( between 0.000% and 0.250% ) when the economy slowed. It has remain at that historically low level for more than a year. For this reason, the Prime Rate has also been historically low. It is currently 3.250%. All home equity loans, that are tied to the Prime Rate, have enjoyed very low interest rates for a long time. Home equity loans have been very cheap loans for a long time.

The margin is added to the index when calculating your interest rate. It is the amount of profit the home loan lender needs to make for doing business. You can find the margin of your adjustable rate home loan in the note. If the margin on your home loan is 3.000%, and the index value is 3.250%, then the fully indexed rate (the interest rate used to calculate your monthly payment) would be 6.250%. Margins on adjustable rate home loans do not normally change during the life of the loan.

Get more information about home equity loans now.


About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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