The Fully Indexed Rate Disclosure is a key document provided to borrowers applying for adjustable-rate mortgages (ARMs) and other variable-rate loans. It reveals the “fully indexed rate” — the interest rate that your loan would carry after the introductory fixed-rate period ends, based on the sum of the current index rate plus the lender’s margin.
Understanding this disclosure is vital because ARMs typically start with a lower, fixed “teaser” rate for a set time (e.g., 3, 5, or 7 years), after which the rate adjusts periodically. The fully indexed rate provides a snapshot of the potential interest rate if the loan adjusted today, helping you anticipate changes in your monthly payments once the fixed period concludes.
Here’s how the fully indexed rate is calculated:
Fully Indexed Rate = Index Rate + Lender’s Margin
- The Index Rate is a benchmark interest rate your lender uses, such as the Secured Overnight Financing Rate (SOFR) or the Constant Maturity Treasury (CMT). This rate fluctuates with market conditions and is outside the lender’s control.
- The Lender’s Margin is a fixed percentage added to the index by the lender and remains constant throughout the loan term.
For example, if the current SOFR is 3.5% and your lender’s margin is 2.5%, your fully indexed rate would be 6.0%. This means after your fixed-rate period, if SOFR stays the same, your interest rate could reset to 6.0%, possibly increasing your monthly payments.
It’s important to note that the fully indexed rate does not factor in the loan’s rate adjustment caps — limits on how much the interest rate can increase at each adjustment or over the loan life. To understand the maximum possible rate, review the lifetime cap defined in your loan disclosure.
The Fully Indexed Rate Disclosure is required by consumer protection regulations including the Truth in Lending Act (TILA) and is typically included in your Loan Estimate and Closing Disclosure documents under the TILA-RESPA Integrated Disclosure (TRID) rule.
Why It Matters
Without this disclosure, borrowers might underestimate future mortgage payments and face financial strain when rates adjust upward. This disclosure empowers you to make informed decisions, compare loan products, and plan your budget accordingly.
Common Misconceptions
- The disclosed fully indexed rate is not a guaranteed future rate; it’s based on the index rate at the time of disclosure.
- The highest your interest rate can reach is the lifetime cap, which may be higher than the fully indexed rate.
- It does not include any temporary discounted or “teaser” rates.
Helpful Resources
For more on adjustable-rate mortgages, see Adjustable-Rate Mortgage (ARM) and to understand how lenders set their margin, see Margin (ARM Loan). You can also learn about rate limits with Interest Rate Cap Structure.
External Authority
For official federal guidance, visit the Consumer Financial Protection Bureau’s page on Adjustable-Rate Mortgages.