ARM interest rate changes have a relationship with the changes in an "index rate."

These indexes tend to go up and down with the general movement of interest rates.

Thus, if the index rate moves up, so will a person's mortgage rate and the person will more than likely have to make higher monthly payments. On the other hand, if the index rate goes down your monthly payment may go down as well.

Lenders base ARM rates on many different indices such as the one, three, or five-year treasury securities

(T-bills).

Among the most common indexes is the national or regional average cost of funds (COFI).

Another widely used index is LIBOR (London Interbank Offered Rate).

The MTA (monthly treasure average) is used but generally found in niche products for first-time homebuers with a few credit issues and for refinancing home owners with marginal credit.

The borrower should always ask what index will be used and how often it will change.

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