The indexes used to calculate ARM interest rates are published financial benchmarks that move with broader borrowing costs, and your lender adds a fixed markup called the margin on top. For new adjustable-rate mortgages originated today, the dominant benchmark is the 30-day average Secured Overnight Financing Rate (SOFR). Some hybrid ARMs still reference a Constant Maturity Treasury (CMT) yield. Older loans may reference the London Interbank Offered Rate (LIBOR) or the 11th District Cost of Funds Index (COFI), both of which have been retired and replaced. Whichever index governs your loan, the mechanics are the same: index value plus margin equals your interest rate.
How the Index Sets Your Rate
Every ARM rate comes from one formula. Take the current value of the index, add the margin your lender set at closing, and that’s your interest rate. The index moves with the market. The margin does not; once written into your loan documents, it stays fixed for the life of the loan.
A quick example. If the 30-day average SOFR is 3.66% and your margin is 2.50%, your fully indexed rate is 6.16%. When the index falls half a point, your rate falls half a point. When it climbs, your rate climbs. Margins for ARMs generally run from about 2% to 3.5%, depending on the lender, the loan program, and your credit profile. Sometimes you’ll see the margin quoted in basis points, where 100 basis points equals one percentage point.
Because the margin is locked, it deserves as much scrutiny as the initial rate when you compare offers. A quarter-point difference in margin compounds across every adjustment for as long as you hold the loan.
Teaser Rates and the Fully Indexed Rate
Most ARMs open with a discounted introductory rate. That number is usually lower than what the index-plus-margin formula would produce at the time of closing. The fully indexed rate is what you get when the discount comes off: the index value plus the margin, with no discount applied. When the fixed period ends, your rate resets to the fully indexed rate, subject to whatever caps your contract contains.
Ask the lender what the fully indexed rate would be today, using current index values. That tells you the rate you’re actually signing up for once the introductory period expires, even if the market doesn’t move between now and then.
Secured Overnight Financing Rate (SOFR)
SOFR measures the cost of borrowing cash overnight using U.S. Treasury securities as collateral. The Federal Reserve Bank of New York publishes it each business day, and it reflects actual transactions in the Treasury repurchase market — a market that moves roughly a trillion dollars or more in daily volume. That transaction volume is what makes SOFR trustworthy as a benchmark. It is anchored to real trades rather than to estimates submitted by banks.
Fannie Mae and Freddie Mac both require the 30-day average SOFR as the index for newly originated ARMs they purchase, which effectively makes it the standard for most conventional adjustable-rate loans in the country.1Freddie Mac. SOFR ARMs Fact Sheet The 30-day averaging matters. It smooths out daily fluctuations so that one unusual trading day cannot distort your rate on the day your ARM adjusts. As of late March 2026, the 30-day average SOFR was approximately 3.66%.2Federal Reserve Bank of New York. SOFR Averages and Index Data
Because SOFR is collateralized by Treasuries, it tracks Federal Reserve monetary policy closely. When the Federal Open Market Committee raises or lowers the federal funds rate, SOFR follows in near-lockstep. For a borrower, that means an ARM tied to SOFR is effectively tethered to the Fed’s interest rate decisions. Watch the Fed, and you’ll have a reasonable sense of where your rate is headed at the next adjustment.
Constant Maturity Treasury (CMT)
The Constant Maturity Treasury indexes represent yields on U.S. Treasury securities adjusted to a standardized maturity, such as one year or five years. The U.S. Treasury Department publishes these yields daily.3U.S. Department of the Treasury. Daily Treasury Rates Some hybrid ARMs, especially those that adjust annually after the initial fixed period, still reference the 1-Year CMT. The 5-Year CMT sometimes shows up on ARMs with longer fixed periods, such as a 10/1 structure.
SOFR and CMT measure different things. SOFR reflects overnight borrowing costs. It’s a snapshot of today. A 1-Year CMT reflects the market’s expectation of where interest rates will sit over the next twelve months, which builds in forward-looking assumptions about inflation and economic growth. That forward-looking component makes CMT behave differently than SOFR during periods of economic uncertainty. Day-to-day, CMT tends to be a little less volatile, which some borrowers prefer for the predictability it offers.
Legacy Indexes on Older Loans
Two indexes that used to be everywhere are no longer available for new loans. If you originated your ARM years ago, one of them may still appear in your paperwork under a replacement name.
LIBOR and Its SOFR-Based Replacement
The London Interbank Offered Rate was the dominant ARM index worldwide for decades. It was calculated from borrowing-cost estimates submitted by a panel of major banks, and that design proved fatally flawed when multiple banks were caught manipulating their submissions. Regulators globally decided to retire it.
Federal banking regulators directed supervised institutions to stop writing new LIBOR-based contracts no later than December 31, 2021.4Federal Deposit Insurance Corporation. Joint Statement on Managing the LIBOR Transition For legacy contracts that referenced LIBOR but lacked adequate fallback language, Congress passed the Adjustable Interest Rate (LIBOR) Act, which replaced LIBOR with a SOFR-based benchmark by operation of law as of the first London banking day after June 30, 2023. The law also established specific tenor spread adjustments, for example adding 0.26161% to SOFR for contracts that previously used 3-month LIBOR, so the transition itself would not change the economics of existing loans.5U.S. Congress. Adjustable Interest Rate (LIBOR) Act
If you still hold an ARM that originally referenced LIBOR, your loan documents or a notice from your servicer should identify the replacement index and any spread adjustment applied. The rate mechanics work exactly as before. Only the index name and value changed.
COFI and Its Replacement
The 11th District Cost of Funds Index was a monthly average of the interest expenses paid by savings institutions in Arizona, California, and Nevada. It was popular for ARMs in the western United States because it moved more slowly than market-rate indexes, giving borrowers a cushion during rate spikes. The Federal Home Loan Bank of San Francisco stopped publishing COFI on January 31, 2022. Freddie Mac developed a replacement called the Enterprise 11th District COFI Replacement Index for legacy loans that still reference it.
Finding the Index in Your Loan Paperwork
Federal law requires lenders to tell you exactly which index governs your loan and how it will be used. When you apply for an ARM secured by your primary home, Regulation Z requires the lender to provide a loan program disclosure identifying the index and margin, the frequency of adjustments, all applicable rate and payment caps, and any rules about negative amortization.6eCFR. 12 CFR 1026.19 – Certain Mortgage and Variable-Rate Transactions You should receive this at application or before you pay any nonrefundable fee, alongside the CFPB’s Consumer Handbook on Adjustable-Rate Mortgages.7Consumer Financial Protection Bureau. Consumer Handbook on Adjustable-Rate Mortgages
The lender must also provide either a 15-year historical example showing how payments would have changed based on actual movements in the index, or the maximum possible rate and payment under the loan’s terms.6eCFR. 12 CFR 1026.19 – Certain Mortgage and Variable-Rate Transactions The historical example translates the abstract index-plus-margin formula into real dollar amounts across a full rate cycle, which is one of the most useful tools for comparing ARM offers against each other and against a fixed-rate loan.
On your Loan Estimate, look for the Adjustable Interest Rate table. It names the index, states the margin, and lays out the initial rate, the minimum and maximum rates, how often the rate changes, and the limits on each change. Every entry in that table is a contractual term. If a lender cannot clearly show you which index will govern your loan, or cannot compute the fully indexed rate at today’s index value on request, that is a reason to keep shopping.