Question:

What is the Option ARM margin?

Answer:

The Option ARM margin is the lender's profit on the ARM. If the lender is offering a LIBOR ARM and they use a 3% margin, the Option ARM will have a fully indexed rate of LIBOR + 3%.

The margin of the Option ARM does not change throughout the life of the loan. However, they often start with a lower rate for limited time.

For example, if the fully indexed rate of your Option ARM is 6.75% (LIBOR + 3%), your start rate may be 2% lower (4.75%) for 3 years; or, could be 1.5% for 3 months. Once the fixed period expires, your rate will be adjusted to reach the fully indexed rate, or according to the value of the LIBOR index and within the adjustment and lifetime caps of the loan.

How big is the Option ARM margin?

The margin depends on the lender and the index they select for their Option ARM mortgage. ARMs tied to low value ARM indexes will have higher margins; ARMs tied to higher value indexes will have lower margins - to arrive at basically the same Option ARM rate of return for the area. However, the Option ARM products packaged by different lenders can have very distinctive features and even ARMs tied to the same index can show different starting rates and margins.

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