Index Rate Law and Legal Definition

Interest rate on a fixed loan is fixed for the life of the loan. Interest rate on a variable rate loan fluctuates. Interest rate for a variable rate loan changes periodically based on a specified index rate. Method used by banks to determine the amount of interest which a borrower will pay on a variable rate loan is an index rate.

An index rate is computed monthly. It is the basis for many adjustable loan payment computations. In pricing variable rate loan index rate is taken as base rate. Adjustable mortgage payments are made up of a margin rate plus an index rate. Common index rates used are: the Federal Home Loan Bank Board's cost of funds index and the National Average Mortgage Contract Rate Index.