What is a Fully Indexed Interest Rate?
A fully indexed interest rate equals an adjustable-rate's ( ) interest rate plus a spread.
How Does a Fully Indexed Interest Rate Work?
The interest rate on an ARM corresponds to a specific benchmark (often the prime rate, but sometimes LIBOR, the one-year constant-maturity Treasury, or other benchmarks) plus a spread (also called the , and its size is often based on the borrower's credit score). The benchmark plus the spread equals the interest rate on the loan; it is called the fully indexed rate. Some ARMs a discounted rate, also called a teaser rate, during the first year or so. For example, if the prime rate is 4%, and the interest rate is plus 5% with a cap of 10%, then the loan's fully indexed interest rate is 9% (5% + 4%).
Why Does a Fully Indexed Interest Rate Matter?
In many cases, ARMs have caps -- limits on how high and sometimes how low the interest rate can go, and how much they can move in a year, month or quarter. In some cases, the interest rateonly adjust up -- that is, borrowers get no benefit if interest rates fall.
For example, if a borrower takes an interest-only loan generates (by increasing the borrower's payments). Because of this risk arrangement, ARMs often carry lower interest rates than fixed-rate mortgages, which in turn might allow borrowers to borrow more than they could under fixed-rate mortgages.that currently carries a 7% interest rate, he hopes rates will drop and his payments will fall accordingly; the , on the other hand, hopes interest rates will increase, which raises the amount of the