Fully Indexed Interest Rate

DEFINITION of 'Fully Indexed Interest Rate'

The interest rate on an adjustable-rate loan that is calculated by adding the margin to an index level. The interest rate on an adjustable (sometimes known as variable) rate loan is tied to a benchmark interest rate, known as an index. Popular indexes for loans are: the prime rate, LIBOR, and various U.S. Treasury bill and note rates. When calculating the fully indexed interest rate, the index level varies according to market conditions but the margin is usually a constant value.

BREAKING DOWN 'Fully Indexed Interest Rate'

For example, the fully indexed interest rate on an adjustable rate mortgage tied to the six-month LIBOR index with a margin of 3% would be 10% if the six-month LIBOR index were at 7%. If the six-month LIBOR index were to adjust upwards to 8%, the new fully indexed interest rate would be 11%.

For some loans, the borrower may have the option of choosing between two or more indexes to which their loan will be tied. Most popular indexes are highly correlated with each other. In general, the lower the level of an index relative to other indexes, the higher the margin on the loan. However, the margin is frequently negotiable with the lender. The choice of the index and the margin, both of which are frequently overlooked by borrowers, can make a big difference over the life of an adjustable rate loan.

RELATED TERMS
  1. Mortgage Index

    The benchmark interest rate an adjustable-rate mortgage's fully ...
  2. Indexed Rate

    An interest rate charged on loans to borrowers that is calculated ...
  3. ARM Margin

    A fixed percentage rate that is added to an index value to determine ...
  4. ARM Index

    The benchmark interest rate to which an adjustable rate mortgage ...
  5. 5-6 Hybrid Adjustable-Rate Mortgage ...

    An adjustable-rate mortgage with an initial five year fixed interest ...
  6. Interest Rate Index

    An index that is based on the interest rate of a financial instrument ...
Related Articles
  1. Fundamental Analysis

    The Importance Of LIBOR In Financial Markets

    What is LIBOR and why are its interest rates so important to the financial markets?
  2. Professionals

    London Interbank Offer Rate (LIBOR)

    CFA Level 1 - London Interbank Offer Rate (LIBOR). Learn how banks use the London interbank offer rate when borrowing funds and how this relates to the fixed-income market.
  3. Professionals

    Mortgage Financing

    Mortgage Financing
  4. Economics

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  5. Home & Auto

    Adjustable-Rate Mortgage Indexes: Know Your Benchmark

    Understanding these benchmarks can help you select the most competitive adjustable-rate loan.
  6. Investing Basics

    How Banks Set Interest Rates On Your Loans

    On the face of it, figuring out how a bank makes money is a pretty straightforward affair. A bank earns a spread on the money it lends out from the money it takes in as a deposit. The net interest ...
  7. Credit & Loans

    All Your Questions About Loan Interest Rates

    If you think interest rates don’t really matter -- think again. Interest rates have a huge impact on your finances.
  8. Investing

    Why BBA LIBOR Was Replaced By ICE LIBOR

    We track the reason behind the change in LIBOR's prefix from BBA to ICE.
  9. Investing Basics

    What is an Index?

    An index is a statistical means of calculating a change in an economy or market.
  10. Investing Basics

    The Pros and Cons of Indexes

    Learn about the advantages and disadvantages of stock indexes and passive index funds. Discover how there is an opportunity cost to using index funds.
RELATED FAQS
  1. How does LIBOR compare to the Federal Reserve rate as an accurate indicator?

    Explore a comparison of the predictive efficacy of the Federal Reserve's fed funds rate and the Intercontinental Exchange's ... Read Answer >>
  2. How is Libor determined?

    Libor is the major rate used to price debt stock. Libor is actually a set of several benchmarks that reflect the average ... Read Answer >>
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  4. What are the differences between the Federal Funds Rate and LIBOR?

    Learn the key differences between the federal funds rate and the London Interbank Offered Rate, including currency denomination ... Read Answer >>
  5. How did LIBOR come into use?

    Learn about the significance of the London Interbank Offered Rate, or LIBOR, and the history of how the daily LIBOR became ... Read Answer >>
  6. How can LIBOR be used as an economic indicator?

    Learn how the LIBOR is used, how it is calculated and how it can be used with Treasury bill rates to gauge the health of ... Read Answer >>
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  4. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  5. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  6. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
Trading Center