Definition:
The Treasury Index refers to the interest rates on U.S. Treasury securities, which are often used as a benchmark for adjustable-rate mortgages (ARMs). These rates help lenders determine how much interest a borrower will pay once the fixed period of an ARM ends.
Example:
Emma has an adjustable-rate mortgage that adjusts annually after a five-year fixed period. Her lender uses the 1-year Treasury Index plus a 2.5% margin to set her new rate. If the Treasury Index is 4.0% at the time of adjustment, her new interest rate becomes 6.5%.
Explanation:
Lenders use financial indexes to calculate interest rate changes on ARMs. One of the most common is the Treasury Index, which tracks the yields (interest rates) of U.S. government debt, such as 1-year or 10-year Treasury securities. Since these securities are considered very low-risk, their rates serve as a stable and reliable foundation for adjusting mortgage rates.
In adjustable-rate mortgages, the borrower’s new rate is determined by adding a fixed margin (set in the loan terms) to the current value of the chosen index. For example, if your ARM is tied to the 1-year Treasury Index and that index goes up, your mortgage interest rate may go up at the next adjustment period.
Why is Treasury Index Important in Real Estate Transactions?
The Treasury Index matters because it affects how much homeowners with ARMs will pay once their rate begins to adjust. A rising index can mean higher monthly mortgage payments, while a falling index might reduce costs. Understanding which index your loan is tied to helps you anticipate future changes in your housing expenses.
For buyers considering ARMs, knowing how the Treasury Index works provides insight into potential risks or benefits in choosing a variable-rate loan over a fixed-rate mortgage.