A borrower has a 5/1 ARM with a current SOFR index of 4.25% and a margin of 2.75%. The initial teaser rate of 3.50% has just expired. Assuming no rate caps apply, what is the borrower's new fully indexed rate?

3.50% — the teaser rate remains until the borrower refinances 4.25% — the rate equals the index alone 7.00% — the fully indexed rate equals the index plus the margin 2.75% — the rate equals the margin alone