The Fully Indexed rate is the total rate that a mortgage payment is based on. The fully indexed rate is equal to the margin plus the index.
When your rate adjusts, your fully indexed rate will be your margin plus your index.
Some of the more common indices are the MTA, CODI, COFI, and the LIBOR.
Your mortgage expert can explain these common indices and their advantages, or disadvantages depending on your objectives.
If you're not already consulting with a mortgage expert, you can call 888-418-4467 and ask for Dave Zwierecki.
An adjustable rate mortgage (ARM) will reset to the fully indexed rate once the initial period ends. The fully indexed rate is equal to the margin plus the underlying index.
The fully indexed rate is calculated based on the index, possible indexes could be Prime, LIBOR, COFI, MTA, etc..., plus the margin. The margin will remain constant (the same) for the life of the loan. However, the index is what will vary. An example would be a loan where you have Prime as your index, and Prime is currently 7.5%, and your margin is 2.5%, so your fully indexed rate would be 7.5 + 2.5 = 10.0%. If Prime happens to go down to 6.5% 1 year later, your fully indexed rate would change to 9.0%.
Most loans that offer a monthly payment of any amount less than the fully indexed rate, still require that the borrower qualifies for the loan, at what the payment would actually ben fully indexed.
A good example is an option arm. This has a completely different fully indexed rate than the rate you are making payments on. Also qualification is typically based on the fully indexed rate as opposed to the low 1% payments available.
Loans with an adjustable rate feature will adjust to the fully indexed rate when the fixed period has expired.
Always ask your lender what the fully indexed rate is on your particular loan. You may want to ask for historical data on what the index tied to your loan is based on.
When looking at the Fully-Indexed rates of Adjustable Rate Mortgages, always consider the volatility of the underlying indices. Because some indices tend to adjust faster and more often than others, a mortgage with the lower Fully Indexed rate today may not have the lowest in the long run.
The Fully Indexed Rate on Hybrid Fixed Rate Pay Option ARM loans may be discounted for as long as 3, 5, 7 or 10 years.