Adjustable-rate mortgages are complicated instruments. No one characteristic fully describes one. This is why, when readers ask me for the pros and cons of COFI ARMs, or Libor ARMs, or flexible payment ARMs, I get heartburn. You can’t assess an ARM based on only one of its features.

But some features are more important than others. If any one feature deserves to be considered the “real price” of an ARM, it is the fully indexed rate, or FIR. Yet ironically, I have never had a reader ask me a question about the FIR.

The FIR is the most recent value of the interest rate index used by the ARM (such as COFI or 1-month Libor) at the time the loan is taken out, plus a margin. The margin is the lender’s spread over the index, often 2.5 percent to 3 percent, but it can vary widely.

On Dec. 20, 2003, when this was written, the most recent value of the COFI index was 1.171 percent for the month of November. If an ARM using COFI had a margin of 3 percent, its FIR would be 4.171 percent.

The importance of the FIR is that it indicates where the ARM rate may go when the initial rate period ends. If the rate index does not change, the FIR will become the ARM rate, subject to any caps that may limit a rate change. Ignoring the FIR is deception by omission.

Just how deceptive this omission can be is well-illustrated by an advertisement for a “1.95 percent ARM,” which I found in my e-mail this morning. What the ad does not say is that the 1.95 percent rate holds for just one month. If I closed on this loan today, and if it used the COFI index with a 3 percent margin, my rate in January would be 1.95 percent, and in February it would jump to 3 percent plus the index value in December.

In other words, the ad told me the rate for one month, but it did not give me any information bearing on what the rate might be over the subsequent 29 years and 11 months. If you went to the lender’s Web site, you would not find the FIR. It is not a required disclosure and does not appear on any documents.

Neither is the FIR mentioned by loan officers. If they can help it, loan officers don’t discuss numbers that invite comparison with those of other lenders. They are in the business of selling ARMs, which they do by focusing on one sexy feature, such as a low initial rate and payment, a stable index, or payment options.

This is why I continually receive letters asking about these features, but I have never had a letter asking me about the FIR. Loan officers may not even know the most recent value of the index, although they will know the margin.

The importance of the FIR to the borrower depends mainly on the length of the initial rate period. With a monthly ARM, it is critically important, as already noted. With an ARM on which the initial rate holds for 10 years, the FIR may mean little. With other ARMs, the importance of the FIR will depend on the likelihood that the borrower will be in the house past the expiration of the initial rate period.

If the FIR is important to you, reconcile yourself to the fact that the system is rigged against you and you are going to have to dig it out for yourself. The loan officer will give you the margin if you ask, and will usually be able to identify the rate index. You are fine if he says COFI, MTA, CODI, or Prime Rate because these are all unique series. Don’t accept “Treasury” or “Libor” because there are multiple indexes under each of these headings, and you need to know the one that applies.

When you have identified the rate index, you can find the latest value on the Internet. Go to “ARMs/Rate Indexes” on my site, where you will find a list of all the indexes, and the Web sites at which the latest values can be found.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at


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