What It Means
A variable interest rateInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more is a rate that can change after you borrow. The Consumer Financial Protection Bureau (CFPB) explains that it has two parts: an index, which is a market rate that moves over time and is usually kept by a third party, and a margin, a set number of percentage points your lender adds on top. When the index moves, your rate follows, within any caps your agreement sets.
Try It: Move the Index and See Your Rate Change
Example numbers to start: a card balance, an example index and a margin of 9 points. Move the slider to change the index.
About more a year on this balance.
About less a year on this balance.
A rough estimate: the yearly rate divided by 12, on a balance that stays the same.
How People Say It
- "Our card's rate went up when the prime rate did."
- "It's prime plus nine."
- "The ARM resets next spring."
The Breakdown
The formula
Variable rate = index + margin
Worked example. A $3,000 card balance with a margin of 9 points, the same shape as the CFPB's own example of a card priced at the prime rate plus 9 percent. The index valuesPersonal valuesThe principles and qualities a person holds most important, such as honesty, family or creativity, which guide their choices and how they judge events. See more are examples only:
| Index | Margin | Rate | Interest for one month |
|---|---|---|---|
| 7.5% | 9 points | 16.5% | $41.25 |
| 8.5% | 9 points | 17.5% | $43.75 |
| 9.5% | 9 points | 18.5% | $46.25 |
What the result means. On this balance, every 1 point the index rises adds $2.50 a month, or $30 a year, in interest. Your statement or card agreement names the index your rate follows and the margin you pay over it.
MortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more caps. An adjustable-rate mortgage (ARM) limits how far the rate can move. The CFPB says a periodic cap is most often 1 or 2 percentage points per adjustment, and a lifetime cap is most often 5 points above or below the starting rate. With a 6% start, a 2-point periodic cap and a 5-point lifetime cap, each adjustment after the first could move the rate 2 points at most, and it could never go past 11%.
Good to Know
The CFPB lists the U.S. prime rate and the Constant Maturity Treasury (CMT) rate among common indexes. On an ARM, the margin is written into your loan agreement and doesn't change after closing, and once any starting rate ends, the index and margin together set the new rate, subject to the caps. Before you sign, find four things in the paperwork: the index, the margin, the caps and how often the rate can adjust.
FAQ
What index does a variable rate follow?
It depends on the product. The CFPB notes that a variable credit card APR changes with an index such as the prime rate, and it lists the prime rate and the Constant Maturity Treasury rate as common ARM indexes.
Can the margin on a variable rate change?
On an adjustable-rate mortgage, the CFPB says the margin is fixed in the loan agreement for good once the loan closes. The index is the part that moves.
How high can an adjustable-rate mortgage rate go?
As high as its caps allow. The CFPB says lifetime caps are most often 5 percentage points above the starting rate, and periodic caps are most often 1 or 2 points per adjustment, so check your own loan's numbers.
Do It in Buhata
Reminders
Set a Reminder in Buhata for the date your rate can next adjust, so you can check the new payment before it's due.
Open BuhataRelated Terms and Categories
- Interest rate
The yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost.
- Fixed interest rate
An interest rate that's set when you borrow and stays the same for the life of the loan, so the monthly payment doesn't change.
- Mortgage
A loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term.
- HELOC
A home equity line of credit: a revolving line secured by your home that you can draw on, repay and draw on again during a set draw period.
- Refinancing
Replacing a loan you already have with a new one, usually to get a lower rate, a different term or a different payment.
Sources
Consumer Financial Protection Bureau, "For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?"; CFPB, "What are rate caps with an adjustable-rate mortgage (ARM), and how do they work?"; CFPB, "Credit cards key terms"
- www.consumerfinance.gov/ask-cfpb/for-an-adjustable-rate-mortgage-arm-what-are-the-index-and-margin-and-how-do-they-work-en-1949
- www.consumerfinance.gov/ask-cfpb/what-are-rate-caps-with-an-adjustable-rate-mortgage-arm-and-how-do-they-work-en-1951
- www.consumerfinance.gov/consumer-tools/credit-cards/answers/key-terms
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