Mortgage Rates Key Terms

Learn the terminology to help you understand mortgage rates

By Sandy Baker

Mortgage rates are complex calculations. Prime rate, LIBOR rates and federal funds rates are common terms associated with this industry. When applying for a loan or considering refinancing, it is essential to understand these rate terms in depth. The following are some of the most common terms found. Business professionals should understand these terms before investing.

Prime interest rate

The prime interest rate is used by most banks and is given to applicants who have the highest credit ratings. Most banks have the same prime rate and it is only given to the banks' best customers. This rate is adjusted when the fed funds rate changes.
Try: MoneyCafe explains the prime rate and gives an historical look at this rate.

Federal funds rate

The federal funds rate is the interest rate changed between depository institutions. These institutions lend funds to each other over night. This rate is established by the Federal Open Market Committee.
Try: The Federal Reserve Bank of New York gives additional information about the federal funds rate and historical data for these rates.

Cost of funds index (COFI)

The cost of funds index (COFI) rate is the rate most often associated with adjustable mortgage interest rates. It is this rate that often determines the movement that adjustable interest rates will take. This rate is the interest paid on savings accounts and often falls behind in market interest rate trends.
Try: Mortgage-X offers historical data and a thorough explanation of the COFI rate.

London Interbank Offered Rate (LIBOR)

The London Interbank Offered Rate is an interest rate charged to banks to borrow funds in the London Interbank market. It is one of the world's most commonly used interest rates, especially for short-term rates. It is commonly used by mortgage lenders when setting adjustable rate loans.
Try: Investopedia explains LIBOR, including how it is used in the United States and worldwide.

Fixed rate mortgages

Fixed rate mortgages have an interest rate that remains the same throughout the duration of the loan.
Try: Mortgage101 outlines how these mortgage rates work.

Adjustable rate mortgages (ARM)

An adjustable rate mortgage is one in which the interest rate may change several times throughout the duration of the loan. The terms of the ARM differ depending on its type and the details in the mortgage agreement.
Try: The Federal Reserve Board outlines adjustable rate mortgages and precautions individuals should take when securing this type of real estate loan.