Nationwide Mortgage Licensing System (NMLS) Practice Exam

Which of the following is correct for an adjustable-rate mortgage?

1. Index - margin = fully indexed rate

2. Margin - Index = fully indexed rate

3. Index + Margin = fully indexed rate

4. Index - Margin = fully indexed rate

The correct answer is: Index + Margin = fully indexed rate

In the context of adjustable-rate mortgages (ARMs), the fully indexed rate is calculated by adding the index to the margin. The index is a benchmark interest rate that reflects general market conditions and can fluctuate over time, while the margin is a fixed percentage that the lender adds to the index. The correct relationship is that the sum of the index and the margin yields the fully indexed rate, which determines the interest that the borrower will pay at the time of adjustment. This rate is integral to understanding how the payment amounts can change over the life of the loan. In this scenario, understanding the roles of the index and the margin is crucial for borrowers as it enables them to anticipate how interest rate changes in the index will affect their mortgage payments over time.