How the constant maturity Treasury rate affects your mortgage

The constant maturity Treasury or CMT rate and the U.S. Treasury play a key role in determining mortgage interest rates for adjustable-rate mortgages. Many ARMs tie their interest rate to the CMT, which means a rising CMT could lead to a higher mortgage interest rate at your next adjustment period.

If you plan on buying a new home, understanding how CMT rates affect your ARM can help you budget more effectively.

What is the CMT rate?

The CMT rate is calculated by taking the average yield of different types of Treasury securities that are set to mature at different times. It’s typically presented as an index tracked by the Federal Reserve Board.

The index shows prospective Treasury security purchasers the average yield they can expect on investments in these debt securities.

Treasury securities are auctioned on the market, and the CMT rate is set based on the yield of the closing bid of these securities.

Types of treasury securities

Learning the basics of Treasury securities enables you to understand the CMT rate. Treasury securities – including U.S. Treasury bills (T-bills), Treasury notes (T-notes) and Treasury bonds (T-bonds) – are debt obligations backed by the federal government.

Investors buy and sell Treasury securities on primary and secondary markets. Treasury securities are considered generally risk-free investments, and the investors who hold them receive payments in exchange for their investment in these federal securities.

T-Bills

T-bills are short-term debts that mature in less than a year. They are low-risk investments and are considered risk-free when they reach maturity.  T-bills with longer maturation rates provide a higher interest rate and better return on investment.

T-Notes

T-notes are government-secured debts with a fixed interest rate and a term of maturity between 2 and 10 years. Owners of T-notes receive payments on their holdings at 6-month intervals until the note matures.

T-Bonds

T-bonds are fixed-rate government debt securities whose maturity period ranges from 10 – 30 years. T-bonds pay investors semiannual interest payments until these investments mature, at which time the owner of the T-bond receives a payment of the bond’s face value.

How the CMT rate is calculated

CMT rates are calculated by determining the Treasury yield curve rate. The curve rate compares and contrasts short-term T-bill yields against long-term investments, such as T-notes and T-bonds. The Treasury yield curve rate also corresponds to any given Treasury security.

After determining the curve rate, average the past week’s or past month’s daily rates aligned to the appropriate constant maturity Treasury.

The CMT rate presents the current hypothetical value of the worth of a U.S. Treasury security – one that’s based on the values of U.S. Treasuries that have been recently auctioned.

How is the CMT rate shown?

The CMT rate is expressed in the form of the 1-year CMT. It’s a measure of value designed to illustrate the 1-year yield equivalent (how much you might expect to earn in interest from these investments each year) of the most recently auctioned Treasury securities. CMT rates may also be expressed in the form of 3-, 5- and 10-year equivalents.

How do lenders use the CMT rate?

Lenders refer to the CMT rate when they adjust home mortgage interest rates on variable-rate loans and other adjustable-rate loan products. If CMT rates change, the amount of interest that you pay each month and over the lifetime of your home loan adjusts to reflect the rate change.

Understanding how CMT rates affect your mortgage interest rate enables you to assess if buying or refinancing your home is right for your needs.

How the CMT index affects mortgage rates

The CMT Index is a reference point that some financial lenders, banks, credit unions and online lenders use to set the cost of variable-rate loans, including ARMs. As market conditions change, lenders adjust the interest rates on these home mortgage products.

Variable-rate lenders first determine a mortgage interest rate based on CMT, adding percentage points (their margin) to set the final rate that borrowers pay for the loan. Your individual risk profile, credit history and other factors also impact the mortgage interest rate available to you.

As a general rule, when the CMT index goes up, any loans that are tied to it – ARMs and other variable-rate products – increase their interest rates.

How changes to the CMT index could affect your budget

If you have an ARM through a lender that uses the CMT index as a guide, changes to the CMT index could ultimately affect your budget. Here’s an example of how this might play out:

Let’s say you have a 5/1 ATM, which means your mortgage interest rate will change after an initial period of five years. After that introductory period, your mortgage interest rate will adjust every year. During the first five years, you had a 6% interest rate on a $200,000 loan balance with a monthly principal and interest payment of $1,199. When the rate was adjusted, an elevated CMT led to a new interest rate of 7%. With that, your new monthly payment rises to $1,315.

Since a rising CMT rate can push your ARM payment higher, keeping an eye on this index can help you decide if you should refinance before your payment adjustment comes around.

The bottom line: Look at CMT rates today before signing an ARM

CMT rates can have a significant effect on ARMs and other variable-rate home loan products, making the CMT rate a factor that you should be aware of before applying for a mortgage.

While your mortgage interest rates aren’t solely based on the U.S. Treasury yields, the CMT rate can impact adjustable-rate mortgage interest rates. Higher interest rates lead to higher monthly loan payments.

Once you understand how lenders calculate mortgage interest rates and what factors influence your loan payments, take action and start your mortgage application online with the Home Loan Experts at Rocket Mortgage^®.