As if there were not enough choices to make when you are buying a house and getting a mortgage, lenders now have such a wide rang of ARMs (adjustable rate mortgages) and the borrower even has to decide upon the index upon whic

The index of an ARM (Adjustable Rate Mortgage) is the underlying standard upon which the adjustments will be made. Today, banks use different indices, such as the rate on government bonds, or the Fed Fund rate or the London Interbank Offer Rate(LIBOR).

You must initially understand that an ARM is a mortgage with an interest rate that moves up or down within a certain set period, and the movements are predicated upon the movements of the underlying index. If your index is CDs, and CDs go up, your interest rate increases. Adjustable rate mortgages have adjustment caps, which means that the interest rate can only be adjusted at given periods, even if the underlying interest rate goes up more often; this can be an advantage if you just readjusted and then rates move up. But be aw are, however, that if you just readjusted at an increased rate, and your index rate goes down, you are stuck with the increased rate until the next adjustment period.

There are any number of ARM indices, including the CDs, LIBOR and government bonds mentioned. Another index that is frequently used is the Federal Funds Rate. Another popular index used by many is the LIBOR, or the London Interbank Offered Rate, which well rated international companies pay to borrow.

Which is the right choice depends on your own circumstances and your view of where interest rates are heading. Adjustable rate home loans that use CDs as the reference rate tend to change more quickly. On the other hand, if your ARM is based on T Bills, it will move more slowly. LIBOR is the index that moves the most frequently and the most quickly, so if you want to take frequent advantage of the downward level of decreasing rates, this is the index for you.

An interesting, and possibly dangerous choice in interest rate choices is the option ARM, which permits the borrower to decide the “option” of choosing his mortgage payment every month. The idea behind these loans is that they are interest interest only loans, so you have to pay that minimum, and then you have the choice to pay more. One of the big problems with an option mortgage is that you can get an increasing instead of decreasing mortgage; this is also called as negative amortization.

With this dizzying choice in interest rate scenarios for your mortgage, the best option is to meet with a mortgage consultant who can explain all of them to you and advise you best on your needs.