What is Current Index Value
Current index value is the most current value for the underlying indexed rate in a variable rate loan. Variable rate loans rely on the indexed rate and a margin to calculate the fully indexed rate that a borrower is required to pay.
BREAKING DOWN Current Index Value
Current index values are used by lenders to calculate the variable rate in a borrower’s loan product. The rate a borrower pays on a variable rate loan product is called the fully indexed rate and is a function of both an indexed rate and a margin. Lenders can offer a variety of variable rate loan products with fully indexed rates that change at differing reset times.
Variable Rate Loans
Variable rate loans have a loan rate that is calculated by adding the indexed rate and the borrower’s margin. An indexed rate is set by the lender and can be based on various indexes including a lender’s prime rate, LIBOR or various U.S. Treasuries. The lender will decide the indexed rate component and will detail the terms in the loan contract. In a variable rate product’s loan underwriting process, the underwriter will assign the borrower a margin based on their credit profile. The borrower is required to pay the fully indexed rate which changes with changes in the underlying indexed rate. For many variable rate credit products the variable rate is volatile which means that it can change at any time. Thus, when the current index value changes, the borrower’s rate will change.
Adjustable Rate Mortgages
Adjustable rate mortgage loans are a lending product that incorporate both fixed and variable interest. Adjustable rate mortgage borrowers will pay a fixed rate for the first few years up until a specified reset date occurs. At the reset date and thereafter a borrower will be charged variable rate interest. The variable rate in an adjustable rate mortgage loan is calculated in the same way as standard variable rate products. The borrower pays an underlying indexed rate plus the margin.
In an adjustable rate mortgage the variable rate interest can be a volatile rate that changes with each change in the underlying current index value or the variable rate can be scheduled. With a scheduled variable rate, borrowers pay a fully indexed rate that is reset at scheduled times. Most adjustable rate mortgages with a scheduled reset date will reset every 12 months. If the variable rate is based on a schedule then the borrower’s interest rate will change to the current index value plus the borrower’s margin on that specific date and the fully indexed rate will remain unchanged until the next reset date.