In an adjustable-rate mortgage (ARM), what does the term "index" refer to?

In an adjustable-rate mortgage (ARM), the term "index" refers to a benchmark interest rate used to determine changes in interest payments. This benchmark is a standard against which the interest rate of the ARM is measured. When the index changes, it directly affects the interest rate applied to the mortgage, which in turn impacts the monthly payments made by the borrower.

The index can be based on various financial indicators, such as the yield on U.S. Treasury securities, the London Interbank Offered Rate (LIBOR), or other financial benchmarks. This dynamic means that as market conditions fluctuate—reflected by the movements in the chosen index—the borrower's interest rate may adjust accordingly, leading to potentially higher or lower monthly payments over the life of the loan. The arm's structure is designed to offer lenders flexibility in relation to market conditions, making the index a crucial aspect of how ARMs function.

Each of the other choices present concepts that do not align with the definition of "index" within the context of ARMs. A fixed interest rate, for instance, does not adjust based on any benchmark and is not applicable to an adjustable-rate mortgage. The borrower's credit score is a measure of creditworthiness, influencing mortgage approval and rate offers but not directly tied to