What is the term for the component of an adjustable interest rate that fluctuates with market conditions?

The term that refers to the component of an adjustable interest rate that fluctuates with market conditions is the index. In an adjustable-rate mortgage (ARM), the index reflects the cost of borrowing that will vary according to current market rates. Common indices used include the LIBOR (London Interbank Offered Rate) or various Treasury securities.

The index essentially serves as a benchmark for the lender to determine the interest rate charged to the borrower. As market conditions change and the index moves up or down, it affects the overall interest rate on the mortgage. This creates a direct relationship between the market environment and the borrower's interest expenses.

Understanding the role of the index is crucial for borrowers, as it helps them anticipate how their payments might change over time based on market fluctuations. In contrast, while the margin, spread, and rate cap relate to adjustable rates, they serve different functions in the context of ARMs. The margin is a fixed percentage added to the index to determine the interest rate, the spread refers to the difference between two interest rates, and the rate cap limits how much the interest rate can increase at each adjustment or over the life of the loan.