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07 March 2011

Meaning of Index

The term  index is used in home loans. Usually the lender offers loan on a predetermined rate of interest. The borrower has knowledge aboout this and this is discussed during the processing of the loan amount.
As we have understood in my previous posts about FRM and ARM. This means fixed rate of interst and adjustable rate of interest for the loan amount to be repaid.
Index is the measure of interst rate changes that the lender uses to determine how much interest will be charged and how much it will change over the loan tenure. Considering the amount and the loan tenure the lender adjusts the index rate. The repaying capacity of the individual is also considered and the lender decides at what rate of interest he will offer the loan. Then how will the interst rate increase or remain same over the total loan tenure will solely depend upon the borrower and how they select fixed interest rate or adjustable interst rate for the repayment of their home loan.
Usually this all is planned and fixed by the lender as they have different packages of repayment according to the total loan amount and monthly repaying capacity of the borrower.A predetrmined index is availabel with all lenders for the benefit of the loan taker so that they can judge about the comfortable repaying options of their home loan.

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