Q: How is an index and margin used in an ARM? A: An index is an economic indicator that lenders use to set the interest rate for an ARM.  Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin.  Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR).