What is the Fully Indexed Rate?
The Fully Indexed Rate (FIR) is a crucial concept in adjustable-rate mortgages (ARMs). It represents the interest rate a borrower would pay if the initial introductory rate (also known as a "teaser rate") on their mortgage expired and the rate adjusted to its fully indexed level based on the chosen index, plus the margin.
Understanding the FIR helps borrowers anticipate potential future payment increases and make more informed decisions when choosing an ARM product. The FIR is calculated by adding the current value of the chosen interest rate index to the mortgage's margin.
Index: This is a benchmark interest rate that fluctuates over time, often based on economic indicators like Treasury yields or LIBOR (though LIBOR is being phased out). Common indices include the SOFR Index, 11th District Cost of Funds Index (COFI), and various Treasury indices.
Margin: This is a fixed percentage added to the index by the lender. It represents the lender's profit and costs associated with originating and servicing the loan. The margin remains constant throughout the life of the loan.
The FIR is a forward-looking estimate. Actual future rates depend on how the index changes over time.