What is an index on an ARM?

In the context of an Adjustable-Rate Mortgage, an index is an externally published interest rate benchmark that the lender uses to determine how your rate will change at each adjustment period. Common indices include the Secured Overnight Financing Rate (SOFR), the prime rate, and various U.S. Treasury rates. When your ARM adjusts, the new rate is calculated by adding the lender's margin to the current index value.

Borrowers with ARMs have no control over the index — it moves based on broader economic conditions. This is why understanding which index your loan is tied to, and how historically volatile that index has been, is an important part of evaluating an ARM product. For buyers in the Western Catskills who may be attracted to the initial lower payments of an ARM for a vacation property in Greene, Ulster, Delaware, or Otsego County, researching the historical movement of the relevant index can help set realistic expectations about how payments might change over time.