(1.) An interest rate which lenders use to calculate the interest rate adjustments for adjustable-rate mortgages (ARMs). The index is what lenders measure the difference between the current interest rate on an adjustable-rate mortgage and money earned on other investments against.

(2.) A lender has no control over the index.

Examples of Indexes 

LIBOR

MTA

CODI

What Role Does the Index Play?

Indexes play in important role in the life of an ARM in that they are effectively what determine the interest rate of an ARM loan once its initial fixed period expires.

Calculating an ARM's Rate Using an Index

Interest Rate = Index + Margin

The Margin of an ARM is fixed from day one. So for the basis of this Example, let's assume the mortgage has a margin of 3.0%. The Index attached to your mortgage is the 6 month - LIBOR, which as of 12/10/07 was 4.91%.

Simpley add to get your Interest Rate:

4.91 + 3.0 = 7.91

So, your current Interest Rate would = 7.91%