California Real Estate SalespersonFinancingMedium
An adjustable-rate mortgage is tied to a 1-year Treasury index currently at 4.2%, with a lender margin of 2.75%. What is the fully indexed rate the borrower's interest rate would adjust to at the next reset, assuming no rate caps apply?
- A2.75%
- B4.20%
- C6.95%
- D1.45%
Show answer & explanationAnswer & explanation
Correct answer: C. 6.95%
The fully indexed rate on an ARM equals the index rate plus the lender's margin: 4.2% + 2.75% = 6.95%.
Why the other options are wrong
- A. This is only the margin, ignoring the index.
- B. This is only the index rate, ignoring the margin.
- D. This is the difference between the two figures, not the sum.
ARM Fully Indexed Rate
The fully indexed rate on an adjustable-rate mortgage equals the index rate plus the lender's margin.
- Index reflects a market benchmark rate (e.g., Treasury, SOFR)
- Margin is a fixed percentage added by the lender
- Rate caps may limit how much the rate can actually adjust
Memory trick: Index + Margin = Fully Indexed Rate.