What is the common term for the rate that is determined by the market in an adjustable-rate mortgage?

In the context of an adjustable-rate mortgage, the common term for the rate that is determined by the market is known as the index rate. This index is a benchmark interest rate that reflects the broader market conditions and fluctuates according to economic changes, such as inflation or shifts in the Federal Reserve's monetary policy.

When the interest on an adjustable-rate mortgage is adjusted, it is typically based on a specific index rate plus a margin. The margin is a fixed percentage added to the index rate which remains constant throughout the life of the loan. Therefore, any change in the index rate directly influences the borrower's interest rate during adjustment periods.

Understanding the concept of the index rate is crucial for borrowers using adjustable-rate mortgages, as it affects their monthly payment amounts and overall loan cost over time. This makes it important for potential borrowers to monitor index rates, as they will ultimately influence their financing costs.