What does the fully indexed rate in an ARM consist of?

The fully indexed rate in an adjustable-rate mortgage (ARM) is determined by adding the margin to the current index rate. The index rate reflects the cost of borrowing in the broader market, such as the London Interbank Offered Rate (LIBOR) or the Constant Maturity Treasury (CMT) rate. The margin is a fixed percentage that is determined by the lender and remains constant throughout the life of the loan. By combining these two components, borrowers can determine what their interest rate will be when it adjusts, which is critical for understanding their future payment obligations.

Other options do not pertain to how the fully indexed rate is derived. The loan amount and loan term relate to the size and duration of the mortgage but do not affect the interest rate calculation. The credit score of the borrower influences the interest rate and loan eligibility but is not part of the index or margin calculation. Lastly, the property value minus outstanding debts pertains to equity considerations and does not factor into how the fully indexed rate is computed.