Which element of an ARM is used as a reliable indicator of change in the cost of money?

In an adjustable-rate mortgage (ARM), the index serves as a crucial element because it is used to determine how interest rates will adjust over time. The index reflects prevailing economic conditions and is typically tied to a specific benchmark, such as government Treasury yields, the London Interbank Offered Rate (LIBOR), or other financial indicators.

The index's fluctuations indicate changes in the overall cost of borrowing money in the market. When the index rises, it typically suggests that the cost of money is increasing, which directly impacts the interest rate on the mortgage. Conversely, if the index declines, it usually means that borrowing costs are decreasing, leading to potential reductions in the mortgage interest rate.

This reliability is essential for borrowers who need to anticipate how their monthly payments may change over the life of the loan. The index often provides more stability than other options, as it is not subject to manipulation by lenders and focuses on actual, observable market conditions.