Question:

What is the adjustable rate mortgage margin?

Answer:

One of the elements of the adjustable rate mortgage is the margin. An adjustable rate mortgage (ARM) is a loan whose rate is tied to an economic index, and the rate and your payments go up or down, according to the index. The ARM rate consists of the index plus the lender's margin.

Interest Rate = Index + Margin

When comparing ARM quotes, consider ARMs based on the same index and compare lenders' margin. The margin is usually 1 to 3% markup and compensates the costs of the lender for extending the loan to you, and their profit on the loan.

ARM borrowers should ask what index is the ARM rate tied to, and how often it tends to change. A low margin will mean that the ARM rate is linked to a volatile index. Ask the loan officer to advise you which index is best for the time being. For example, slow adjustable rate mortgage indexes are useful in times of rising rates; quickly changing ARM indexes have to be avoided when rates are rising.

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Common misspellings: mortage and morgage