Fully Indexed Rate Calculator
Understanding the Fully Indexed Rate
The Fully Indexed Rate is a critical concept for borrowers with Adjustable-Rate Mortgages (ARMs). It represents the theoretical interest rate on your loan if it were to adjust today, ignoring any specific interest rate caps or floors that might be in place for your specific loan term. It is the summation of two distinct parts: the variable financial index and the lender's fixed margin.
The Formula
The calculation for the fully indexed rate is straightforward arithmetic:
For example, if your loan is tied to the SOFR (Secured Overnight Financing Rate) index currently at 5.00% and your loan agreement specifies a fixed margin of 2.50%, your fully indexed rate is 7.50%.
Key Components Explained
1. The Index
The index is a benchmark interest rate that reflects general market conditions. It moves up and down based on the economy. Common indices include:
- SOFR (Secured Overnight Financing Rate): A broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
- CMT (Constant Maturity Treasury): Based on the yield of U.S. Treasury securities.
- COFI (Cost of Funds Index): Represents the weighted average cost of funds for savings institutions in certain districts.
2. The Margin
The margin is the "markup" your lender charges above the index. Unlike the index, the margin is fixed for the life of the loan. It is determined at the time of your application based on your credit score and risk profile. Common margins range from 1.75% to 3.50%.
Rounding Rules
While the math is simple addition, the final rate applied to your loan is often subject to rounding rules defined in your promissory note. The most common practice is rounding the result to the nearest one-eighth of one percent (0.125%). Our calculator provides both the raw sum and this standard rounded figure to help you estimate your potential new rate accurately.
Why This Calculation Matters
If you have an ARM, your interest rate is fixed for an initial period (e.g., 5, 7, or 10 years). Once that period ends, your rate will adjust annually or semi-annually. The lender calculates the new rate by taking the current index value and adding your margin.
Important Note on Caps: Even if the Fully Indexed Rate is calculated to be very high, your actual rate may be limited by "Periodic Caps" (how much the rate can change in one adjustment) or "Lifetime Caps" (the maximum rate allowed over the life of the loan). Always check your loan documents to see if these caps apply to your situation.