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Adjustable rate mortgages go up and down with interest rates, based on several esoteric money market indexes which cause the cost of funds for lenders to vary. Several popular indexes include Treasury Securities, Cost of Funds, Certificates of Deposit, and Libor (London inter-bank offering rate). Most big city newspapers publish ARM index rates.
The interest rate and payment adjustments do not always coincide. There is usually a lag. There are a variety of consumer protections built into these loans. But consumers need to beware of advertising and other claims made by lenders.
For more information, consult the "Consumer Handbook on Adjustable-Rate Mortgages," available from the Federal Reserve Bank of San Francisco Public Information Department, P.O. Box 7702, San Francisco, CA 92120; (415) 974-2163.
