Margin is the fixed percentage added to the index rate in an adjustable-rate mortgage (ARM) to determine the interest rate charged to the borrower.
The margin in an adjustable-rate mortgage (ARM) refers to the fixed percentage that is added to the index rate to determine the interest rate charged to the borrower. The index rate is a benchmark interest rate, such as the London Interbank Offered Rate (LIBOR) or the U.S. Prime Rate, which fluctuates over time based on market conditions.
When you have an ARM, your interest rate is not fixed for the entire loan term. Instead, it adjusts periodically, typically annually, based on changes in the index rate. The margin is a constant value specified in the loan agreement, representing the lender’s profit margin and covering their cost of doing business.
To calculate the interest rate charged to the borrower, the margin is added to the current index rate at the time of adjustment. For example, if the index rate is 3% and the margin is 2%, the interest rate on the ARM would be 5%.
It’s important to note that the margin, along with the index rate and any adjustment caps or limits, determines how much your interest rate can change over the life of the loan. These factors are specified in the loan agreement, providing transparency and allowing borrowers to understand the potential adjustments to their interest rates.
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