Adjustment Index

You bought an ARM (with an arm and a leg). ARM: Adjustable Rate Mortgage. The key word in there is "Adjustable." So you may fairly ask the smiling banker as she's shaking your arm off, so happy to have sold you this loan, "What adjusts?" And she replies, "Your interest rate." "Based on?" "An index. We use LIBOR, the London Interbank Offered Rate. Your loan is priced at 200 basis points, or 2% above LIBOR, and we adjust the rate every quarter."

So as you start out on your 30-year sojourn to pay off your mortgage and own the house that currently owns you...you gulp with LIBOR at 3% and you now paying 5% interest on your remaining $387,500 of mortgage. LIBOR stays the same for 6 months, then goes up a quarter point to 3.25%, and your rates go up to 5.25%. That LIBOR figure, broadly published around the world, is your adjustment index, reflecting the changing rent you continue to pay on the money you've borrowed. There's a reason that banker is smiling.

And no, that vibrating sound is your knees knocking as you think about LIBOR going to 7% and you living in your parents' station wagon down by the river.