Computing New ARM Rates May Require Some Sleuthing
MANY HOMEOWNERS with adjustable-rate mortgages are nearing the day when their interest rate gets its first adjustment. Those facing a payment increase likely will be double-checking their lenders' math just to make sure they won't be paying a cent more than they are required.</br></br>But owners whose interest rates are tied to Treasury securities' rates might be puzzled if they try to figure out just how lenders compute their new rates. Typically, these mortgages will be adjusted to a rate that's a percentage point or two above the rate for a one-year or three-year Treasury bill index.</br></br>The trouble seems to be finding out what the index figures are. Many assumed they could simply turn to the appropriate yield figures for Treasury bills published in this newspaper and others. Not so.</br></br>The correct source is the Treasury constant maturities index, and the Federal Reserve System is believed to be the only one that publishes it. This index is a theoretical construct that computes what the yield would be on Treasury securities if issued during that period. Consequently, the index isn't identical to any real security.</br></br>Why was such an obscure index chosen? For one thing, it's difficult to base the rates on actual new issues of Treasury securities because they are auctioned intermittently. In addition, lenders say the constant maturity index is the fairest reflection of the cost of money.