In an ARM, what does it mean when a rate is described as "fully indexed"?

When a rate is described as "fully indexed" in the context of an adjustable-rate mortgage (ARM), it specifically refers to the combination of the index rate and the lender's margin. The index rate is a benchmark interest rate that reflects general market conditions, while the lender's margin is an additional amount that the lender adds to the index rate to determine the final interest rate charged to the borrower.

The concept of a fully indexed rate is important because it helps borrowers understand the potential variability of their interest rate over time. As market conditions cause the index rate to fluctuate, the fully indexed rate can also change, impacting the overall cost of the mortgage.

Understanding the calculation of the fully indexed rate is crucial for borrowers to anticipate how their payments may adjust during the life of the loan, which is not something addressed by including servicing fees or defining a maximum interest rate. Hence, the correct interpretation of a fully indexed rate as the combination of the index and margin provides vital insight into how ARMs function.