In an adjustable-rate mortgage, what determines the fully indexed rate?

• A. The index alone
• B. The margin alone
• C. The initial note rate
• D. The sum of the index and the margin

Answer: (D)

In an adjustable-rate mortgage, the rate you pay after each adjustment is determined by adding the current index to the loan’s fixed margin. The fully indexed rate is the sum of the index and the margin. The index moves with market conditions, while the margin stays constant for the life of the loan. The initial note rate is just the starting rate and may differ from the fully indexed rate once adjustments occur. For example, if the index is 2.50% and the margin is 2.75%, the fully indexed rate would be 5.25%. Caps may limit how much the rate can move, but the core calculation remains index plus margin.