What is an MTA Index?

26 Feb

AAMI recommends the MTA-indexed program as the number 1 mortgage offered today in the USA.  The COFI would be our 2nd choice; next would come either the COSI or CODI with the LIBOR coming in last place.  The first four programs work exactly the same way. E.g., four monthly payment options, a yearly 7.5% payment cap, a Life Cap, a fixed Margin, and a slow moving monthly Index (the LIBOR does not offer yearly payment cap protection), however there are some glaring differences:

  • History proves that the MTA-indexed mortgage has offered a lower fully-indexed Rate (Index + Margin) vs. the COFI, COSI and CODI’s fully-indexed Rate over the past 10-15 years.
  • Currently the MTA’s fully-indexed Rate is lower than the COFI, COSI and CODI.
  • MTA and COFI both offer a 9.95% life cap; however the COSI & CODI’s life cap is 11.95%.
  • MTA offers the lowest Margins (this is Key)
  • MTA offers a lower “Starting Rate” of 1.00% vs. the COFI’s 2.0%.  (Both the MTA and COFI’s initialStart Rate” is a true P.I. Rate for the first month. However, the COSI and CODI initial Start Rate of 1.5% – 1.95% begins {day one} with the fully-indexed Rate or Index + Margin.) 

Explanation of the MTA-Index:

The 12-month MTA-Index (Month Treasury Average) is based on the average annual monthly yields of U.S. Treasury Securities, (T-Bill) adjusted to a constant maturity of one year, as made available by the Federal Reserve.  This Index is determined by adding together the monthly yields for the most recent 12 months and dividing by 12.  Because it’s an average, higher yields in some months are offset by lower yields in others. This Index has averaged below 5% over the past 14 years.

If you add the current monthly MTA-Index to a Margin and it will equal the current monthly “fully-Indexed” Rate; the Margin never changes.  Over the last fourteen (14) years, with Mr. Greenspan continually increasing then decreasing the PRIME Lending Rate, the MTA-Index has averaged below 5%.  Therefore, if you’re worried about the Life Cap (Index + Margin) going up to its max of 9.95% you need to understand how the MTA moves. E.g., if you had a 2.0% Margin, the MTA-Index would be capped at 7.95%, or 9.95% – 2.0% = 7.95%. Again, this Index has averaged below 5% over the past 14 years. This low average is one of the main reasons why none of our past Clients have ever needed to refinance off of this mortgage program.  Because when Fixed-Rates start to drop so does the MTA-Index.  Moreover, when the Fixed-Rates start to move higher, the MTA-Index moves slightly higher, and very slowly.

The “Margin” is how the Lender makes their “profit”.  I.e., if the Margin is 2.95%, the Lender will always make 2.95% of the existing loan amount regardless of what the monthly Index does.  If the Index goes up, the Lender only earns 2.95%; if the Index goes down they only earn 2.95% of the new loan balance.  The Margin directly affects the monthly:

Principal and Interest (P.I.) payment or (Index + Margin x outstanding loan balance)

Fully-Indexed Rate (Index + Margin)

(Index + Margin x outstanding loan balance)

If you always make the Fully-Indexed payment (Scheduled payment), the 7.5% yearly Payment Cap will most likely never come into force, even if the Index increased for a long period of time. This is because of a “decreasing” loan balance. E.g., if you had a $250,000 balance on 01/01/04, and the fully indexed rate (Index + Margin) was 3.979% or 2.75% Margin + 1.229% Index; the fully-indexed payment would be $1,190.51. Let us assume the (next months) new Index increases by 0.05 bps to 1.234% (Margin is fixed for the life of loan); the new fully-Indexed Rate would be 3.984%. We can see that 3.984% is higher than 3.979% however, the new monthly payment would actually drop because the new loan balance would be lower. For example, $249,638 x 3.979% = $1,188.79.  If you only make the “Minimum” payment or “Interest-only” payments, the yearly 7.5% Payment Cap will come into play (on your next yearly anniversary date) and increase your prior year “payment” no more than 7.5%. (The 7.5% payment cap has nothing to do with your fully Indexed Rate or Index + Margin.)

  • Every month a mortgage statement will be mailed to you, (even though you can make payments electronically.)
  • You will be given the choice to pay the Scheduled payment, the “Minimum payment” or more than the Scheduled payment, e.g., a 15 year payment, every month.
  • Both payment options (“Minimum” and “Scheduled”) will pay your house off in 30 yrs. or less. (Read further information regarding your different pmt options.)

12 month MTA-Index January 1990 to present.  This Index has averaged below 5% over the past 14 years. (2 month lagging):

As of 2/01/2005:

The MTA Index over the past –

14 years has averaged

4.543%

The MTA Index over the past –

13 years has averaged

4.340%

The MTA Index over the past –

12 years has averaged

4.279%

The MTA Index over the past –

11 years has averaged

4.340%

The MTA Index over the past –

10 years has averaged

4.368%

The MTA Index over the past –

09 years has averaged

4.194%

The MTA Index over the past –

08 years has averaged

4.016%

The MTA Index over the past –

07 years has averaged

3.787%

The MTA Index over the past –

06 years has averaged

3.505%

The MTA Index over the past –

05 years has averaged

3.231%

The MTA Index over the past –

04 years has averaged

2.596%

The MTA Index over the past –

03 years has averaged

1.827%

The MTA Index over the past –

02 years has averaged

1.478%

The MTA Index over the past –

01 years has averaged

1.459%

 

What is an index?

An index is an independent, published economic indicator.  There is a wide variety of commonly used interest rate indices including the 12-Month Treasury Average Index (12-MTA), the 11th District Cost of Funds Index (COFI) and the 1- Year Constant Maturity Index (CMT).  Lenders use indices to establish the interest rate for an adjustable rate mortgage.  Additionally, ARM rates follow the movement of these indices.  The lender adds a specified number of percentage points, called a margin, to the index to establish the actual ARM interest rate.  For further details check out mortgage sites.

What is the 12-MTA?

The 12-Month Treasury Average Index (12-MTA) is based on the average annual yields on U.S. Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve.  The 12 months average is determined by adding together the annual yields for the most recently available 12 months and dividing by 12.

Stability: The 12-MTA

The 12-MTA Index does not move up or down as rapidly as other market interest rates because the 12-MTA is an average of annual yields on U.S. Treasury Securities over a 12-month period.

As a result:

  • Higher yields are offset by lower yields on a monthly basis
  • It creates an index which is far less volatile than other indices
  • Interest rate increases take longer to affect the 12-MTA than other ARM indices

Historically, MTA adjustable home mortgage loans have not exhibited sharp interest rate increases such as those that occurred in the late 1980s. Additionally, unlike more volatile indices, the 12-MTA has never increased more than .25% in any month for over a decade.

MTA vs. Other Adjustable Loan Indices

The MTA is a very slow index. The index is nearly as stable as the world’s most stable index, The Cost of Savings Index. However, MTA adjustable home mortgage loans generally have better margins which are fixed through the lifetime of the mortgage.

Because the MTA is an average annual yield on U.S. Treasury Securities there is an inherent “lag” in the index which ultimately causes the index to move very slowly. Again, in any given month the index has never raised over .25% for the last decade.

Advantages of 12 Month MTA ARMs:

MTA adjustable home mortgage loans have several advantages. Flexibility in the monthly payment: It is one of the main advantages of MTA ARMs. With MTA adjustable home mortgage loans you will have a choice of payment options. Besides a full principle and interest and minimum payment options your MTA ARM will have an interest only payment option and also a 15 year amortization payment option. You have the ability to change payment options every month if you like.
Tax Planning: MTA adjustable home mortgage loans may be used for tax planning. The borrower can defer interest payments and at the end of the year, analyze their tax situation. If it serves their tax interests, they can make a lump sum payment toward any interest that has been deferred and deduct it for tax purposes.
Easy qualifying: Many MTA adjustable home mortgage loan lenders allow homebuyers with good credit to apply without documenting their income, assets, or source of down payment. This is helpful for self-employed borrowers or those who have jobs where it is difficult to document their income. Low initial rate: Most MTA ARMs are offered with a very low initial rate. Some lenders will allow you to qualify for a larger loan due to this initially lower rate.

Why Consider an MTA ARM:

  • The monthly payment is much lower than with a conventional loan (Low Initial Rate).
  • It is a good mortgage for those with less than perfect credit or if your debt ratio is too high.
  • It is a good mortgage for those living pay check to pay check, or if you need to reduce your monthly payments.
  • Monthly savings can be invested or used to pay off credit cards or to start or augment your savings and investments.
  • It is a good mortgage if you have a need to accumulate more assets, or the need to fund retirement accounts (higher return on your investments).
  • The MTA is a good fit for home buyers who own their own business, have a fluctuating income, or live on commission.
  • It is popular with people who invest in real estate.
  • It is more insulated against market changes.
  • It offers flexibility in your monthly payment – you will have a monthly choice of payment options.
  • The MTA ARM provides more opportunities for financially savvy borrowers who seek more customized and ultimately less costly home-finance choices.
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