Which index is commonly used in the residential mortgage industry for adjustable-rate mortgages?

The London Interbank Offer Rate (LIBOR) is widely used in the residential mortgage industry for adjustable-rate mortgages (ARMs) because it reflects the average interest rate at which major international banks are willing to lend to one another. It is particularly useful for ARMs, as it is a benchmark that responds to shifting market conditions and influences the cost of borrowing. When a borrower’s mortgage interest rate adjusts, it is often based on LIBOR plus a margin determined by the lender. This means that when LIBOR changes, so does the interest rate the borrower pays, making it an effective tool for lenders to align the interest rates of adjustable-rate loans with current market conditions.

In the context of adjustable-rate mortgages, other indices, such as the Consumer Price Index (CPI), Federal Funds Rate, and Ten-Year Treasury Rate, do not have the same level of direct influence on mortgage rates as LIBOR. While they may impact overall interest rates or economic conditions, they are not typically used as the primary index for ARMs. LIBOR's relationship with short-term interest rates and its use as a benchmark for a variety of financial products solidifies its role as the common choice in this sector.