What is an index used in adjustable rate mortgages?

In the context of adjustable rate mortgages, the correct choice is the Cost of Funds Index (COFI) due to its specific role as a benchmark for interest rate adjustments. COFI is widely used in the mortgage industry, particularly for loans that are tied to the fluctuating costs of funds, making it relevant in determining how monthly payments adjust over time in adjustable rate mortgages (ARMs).

This index reflects the actual cost of funds that lenders incur and can be influenced by various economic factors. Since adjustable rate mortgages periodically adjust their interest rates based on specific indices, COFI allows for a more accurate representation of those adjustments, ensuring that they are aligned with real market conditions. As a result, borrowers can be more informed about the changes in their payments as they follow the trends of the index.

While LIBOR, the Prime Rate, and Base Rate are also used as benchmarks for different types of variable interest financial products, they are not as commonly associated with adjustable rate mortgages when comparing the specific context of this question. Each of these alternatives serves different purposes in financial markets, such as governing the cost of borrowing or reflecting broader economic conditions, but COFI is particularly tailored for the nuances of adjustable rate mortgages.