The Fully Indexed Accrual Rate (FIAR) is a crucial concept in adjustable-rate mortgages (ARMs). It represents the actual interest rate a borrower pays after the initial teaser or introductory period ends. FIAR is calculated by adding the index rate to the lender's margin.
FIAR is the sum of the current index rate and the lender’s set margin. For example, if the index rate (like LIBOR or SOFR) is 3%, and the lender's margin is 2.5%, the FIAR would be 5.5% (3% + 2.5%).
Consider an ARM with a 3% teaser rate for the first three years. If the index rate at the end of this period is 4% and the lender’s margin is 2%, the FIAR would become 6% (4% index rate + 2% margin). This new rate would then determine the borrower's future monthly payments.
It's vital for borrowers to understand the concept of FIAR, as it impacts the long-term cost of their loan. Awareness of potential rate increases post-teaser period can help in better financial planning and decision-making regarding ARMs.
The Fully Indexed Accrual Rate is a key element in the structure of adjustable-rate mortgages. Prospective borrowers should factor in the FIAR when considering ARMs to ensure they can afford potential rate increases over the term of their loan.