DEFINITION of 'ARM Margin'

A fixed percentage rate that is added to an index value to determine the fully indexed interest rate of an adjustable rate mortgage (ARM). The margin is constant throughout the life of the mortgage, while the index value is variable. For example, the index might be the prime rate, which varies according to market conditions, and the margin might be 2%. If the prime rate were 5% and the margin 2%, then the fully indexed interest rate would be 7%. If the prime rate rises to 6% (the margin remains constant), the fully indexed interest rate would be 8%.

BREAKING DOWN 'ARM Margin'

An ARM's margin is a very important and often overlooked part of the loan's interest rate. The margin is frequently negotiable with the lender. Different margins should be expected with different indexes as various popular indexes differ in their historical values relative to each other. In other words, the lower the index level, the higher the expected margin. When various index/margin options are available to a borrower, an analysis should be performed to determine which is the most economical.

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