Adjustable Rate Mortgages – Fully Indexed Rate: What is it?
August 12th, 2007 by John Thomas
Fully Indexed Rate – What is it?
When you get an Adjustable Rate Mortgage (ARM) you get an initial rate that is fixed for a certain period of time say five years for example. After the first five years of the loan, your interest will begin to adjust based on two factors: your index and your margin. The interest rate that your loan will adjust to after the fixed period is called the Fully Indexed Rate.
The fully indexed rate is the combination of the index the lender has chosen plus the fixed margin the lender places on the loan. This is often different than the initial rate offered, or the start rate. The fully indexed rate will only fluctuate at the adjustment period of your ARM, and may be subject to caps that determine how much they may increase within a certain time period.
For example, lets assume you got a 30 year loan that was a 6.0% 5 year ARM. What this means is that you have a loan for the next 30 years and the interest for the first 5 years is fixed at 6.0%. After the first five years, your interest will then change based on two factors: index and margin. The index is picked when you get the loan and will always be they same index. For this example we will use a LIBOR Index. The margin is determined by the lender at the time you get the ARM and is also fixed for the life of the loan. You interest rate at the adjustment period is determined by adding the current index rate to the margin to come up with your current interest rate. So if you have a fixed margin of 2.0% then you would add 2.0% to whatever the index was at the time of adjustment. So if the LIBOR index was 3.0% then the interest rate would be 2 + 3 = 5.0%. Your new interest would drop from 6.0% to 5.0% in this example.
If you have more questions on Adjustable Rate Mortgages or would like to apply for a mortgage, please feel free to call me at 302-703-0727 or send an e-mail to jthomas@primeres.com. You can also APPLY ONLINE.
John R. Thomas – Certified Mortgage Planner – Primary Residential Mortgage, Inc.
302-703-0727 DE Office / 610-906-3109 PA Office / 410-412-3319 MD Office
I am a Delaware native who has been actively involved in the Mortgage and Finanace industries for over 10 years. Call me at 302-703-0727
[...] interest would be. When the rate changes after the initial fixed period, the new rate is called The Fully Indexed Rate. With this information you can understand what would happen if you still had the loan after the 5 [...]