VA Hybrid mortgages (like most adjustable-rate mortgages) use the Constant Maturity Treasury index. Often abbreviated as the CMT index, this measures the one-year yield of recently auctioned U.S. Treasuries. From Investopedia: This article will help you get a more in depth understanding on how a VA hybrid loan works. VA Hybrid mortgages could save you a lot of money and are definitely something to consider. Understanding the CMT index and how it works with VA arm loans will help you make a better educated decision.
A Closer Look at Hybrid Mortgages & the CMT Index
The interpolated one-year yield of the most recently auctioned four-, 13- and 26-week U.S. Treasury bills, plus the most recently auctioned 2-, 3-, 5- and 10-year U.S. Treasury notes as well as the most recently auctioned U.S. Treasury 30-year bond, plus the off-the-runs in the 20-year maturity range.
For the purpose of ARMs, the CMT index for the past year is calculated each day (on a rolling 365-day basis). To calculate the 1-year CMT, the U.S. Treasury takes all the daily performances for the last year and averages them, which takes a lot of the volatility out of the index, making it a lot more predictable and mild for borrowers who are wondering where their loan will adjust in the coming year. While some adjustable rate mortgages have the option of using a different index, all VA ARMS are tied to the CMT index and cannot use a different one.
Understanding constant maturity isn’t really very important for understanding your VA loan, but for your information, here is the definition from Investopedia:
An adjustment for equivalent maturity, used by the Federal Reserve Board to compute an index based on the average yield of various Treasury securities maturing at different periods. Constant maturity yields on Treasuries are obtained by the U.S. Treasury on a daily basis through interpolation of the Treasury yield curve, which in turn is based on closing bid-yields of actively-traded Treasury securities. Constant maturity yields are used as a reference for pricing debt securities issued by entities such as corporations and institutions.
The CMT index is always fluctuating, but it has been extremely low for several years now, and as of the week of the writing of this article, is sitting at .12%. Considering that the index is added to the margin of the lender, and that Low VA Rates is offering either a 2% margin or 2.25% margin (depending on what your starting rate is), that means your rate after your fixed period could be as low as 2.12%. That’s a pretty fantastic rate, considering the best you could reasonably expect on a VA fixed-rate mortgage is 3.75%, and probably higher.
The margin that the lender charges is essentially how they make a profit. The full term is “profit margin”, The CMT index measures risk-free securities (hint: not mortgages), therefore, as lenders use the CMT index to calculate interest rates on securities that are not risk free (e.g. homes), they need to pad the index with a profit margin to protect themselves from the risk. If you’re interested in learning more about the CMT index, other indexes, or investing in general, feel free to check out the links above to investopedia, or give us a call here at Low VA Rates, and we’ll be happy to address any questions you have related to the VA loan program.