Everything You Need to Know About the Constant Maturity Treasury Index (CMT)
Accurate, concise, and clear information on the CMT can be hard to find, and we hope to provide that in this article. There are three basic things you need to know about the CMT and how it relates to the VA loan program: first, you need to know what the CMT affects and what it doesn’t affect. Second, you need to know what the index measures and how volatile it is. Third, you need to know other indexes that are used for similar purposes so you can compare different indexes and different hybrid ARM options. We’ll cover all three of these things in this article.
What does the CMT have to do with the VA loan program?
The CMT is what the VA uses to determine the interest rates on their hybrid ARM loan options. Interest rates for fixed-rate loans are calculated differently. In a VA hybrid ARM loan, the starting interest rate is whatever the lender is willing to offer, and that starting interest rate continues until the end of the initial fixed period, usually 3 to 5 years. It is after that initial period that the CMT index begins to affect the interest rate, because it is calculated by adding the current CMT index value with the margin that you and the lender agreed to at loan closing. On a VA hybrid ARM loan, the margin will either be 2% or 2.25%. Right now, the 1-year CMT is at 0.23%, so if you had a 2% margin, your current interest rate would be 2.23%. Since the margin is consistent for the life of the loan, any changes to your interest rate are a direct result from changes in the index.
What does the CMT Index measure and how volatile is it?
In short, the CMT measures the return on treasury securities. To put it in a more understandable way, the CMT measures the rate at which an investment should be considered risk-free. In other words, if an investment is considered risk-free (like a savings account), it should have an interest rate comparable with the current CMT, or the CMT at the time the investment was made. Here’s more from Bankrate:
Investors and those following the movement of interest rates look at the movement of Treasury yields as an indicator of things to come. Their rates are considered an important benchmark: Because Treasury securities are backed by the full faith and credit of the U.S. Treasury, they represent the rate at which investment is considered risk-free.
The CMT is not very volatile. In fact, it is because of how placid it is that the VA chose it to base hybrid ARM interest rates off of. The VA has an interest in the loan because they are guaranteeing a percentage of it, so naturally they aren’t going to want to slap their guarantee on a loan based on an index that is likely to drive borrowers’ interest rates up 5 percentage points in just a few years. Your interests and the VA’s interest line up in this instance.
What are other indexes used for ARM loans?
The main other one is called the LIBOR and is used for conventional ARM loans. The LIBOR is more volatile than the CMT and is prone to greater fluctuations in shorter amounts of time. At the moment, the LIBOR is at 0.72%, which is half a percentage point higher than the CMT. The 1 year LIBOR is consistently higher than the 1-year CMT and is also more prone to jump around, which makes the CMT a far more desirable index to base your ARM off of. Having access to the VA hybrid ARM loan is a great benefit and advantage over civilians whose only options are conventional and FHA loans.
For you as a borrower, that’s really all you need to know about the CMT index. Remember thaIf you have more questions about the CMT or about VA hybrid ARMs in general, give us a call and we’ll answer your questions.