For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work? | Consumer Financial Protection Bureau (2024)
With an adjustable-rate mortgage, the initial teaser rate is generally only for the first few years, and then it begins to adjust periodically. Once the rate begins to adjust, the changes to your interest rate (and payments) are based on the market, not your personal financial situation.
To calculate your new interest rate when it’s time for it to adjust, lenders use two numbers: the index and the margin.
Index + Margin = Your Interest Rate (subject to any rate caps)
The index is an interest rate that fluctuates with general market conditions. Changes in the index, along with your loan’s margin, determine the changes to the interest rate and your payments for an adjustable-rate mortgage loan. If interest rates go up, your payments will go up, so these loans have future risks that other loans do not. The lender decides which index your loan will use when you apply for the loan, and this choice generally won’t change after closing.
The margin is the number of percentage points added to the index by the mortgage lender to set your interest rate on an adjustable-rate mortgage (ARM) after the initial rate period ends. The margin is set in your loan agreement and won't change after closing. The margin amount depends on the particular lender and loan.
The fully indexed rate is equal to the margin plus the index.
Margins and indexes are two of many terms that determine your monthly payment for an adjustable-rate mortgage. It’s also important to understand caps, carryover, and other terms. If you’re considering an adjustable rate mortgage, read the Consumer Handbook on Adjustable Rate Mortgages (CHARM) booklet.
The difference between a fixed rate and an adjustable rate mortgage is that, for fixed rates the interest rate is set when you take out the loan and will not change. With an adjustable rate mortgage, the interest rate may go up or down. Many ARMs will start at a lower interest rate than fixed rate mortgages.
(ARM), what are the index and margin, and how do they work? For an adjustable-rate mortgage, the index is an interest rate that fluctuates periodically based on general market conditions.The margin is a number set by your lender when you apply for your loan.
The interest of adjustable-rate mortgages (ARM) are tied to the index and margin. The index is a reference point for the interest rate and will vary based on the market. The margin, on the other hand, is a firm set of percentage points that the lender determines.
An ARM index is a base interest rate used to compute adjustable-rate mortgage interest for some time period. This index or reference rate can be the prime rate, the London Interbank Offered Rate (LIBOR), or the rate on U.S. Treasury bills, among others.
An adjustable-rate mortgage (ARM) is a loan with an interest rate that will change throughout the life of the mortgage. This means that, over time, your monthly payments may go up or down.
ARMs are also called variable-rate mortgages or floating mortgages. The interest rate for ARMs is reset based on an index plus an additional spread called an ARM margin.
A 5/1 ARM is one type of adjustable-rate mortgage. The “5/1” refers to the length of the fixed-rate period and the frequency of rate changes, respectively. The “5” is the fixed-rate period of the mortgage — the first five years. The “1” is how often the interest rate adjusts after that — once per year.
The term current index value refers to the most current value for the underlying indexed rate in a variable rate loan. Variable rate loans rely on the indexed rate and a margin to calculate the fully indexed rate that a borrower is required to pay.
The margin is set in your loan agreement and won't change after closing. The margin amount depends on the particular lender and loan. The fully indexed rate is equal to the margin plus the index. Margins and indexes are two of many terms that determine your monthly payment for an adjustable-rate mortgage.
One of the significant drawbacks of adjustable-rate mortgages is the potential for the monthly mortgage payment to increase. As the interest rate adjusts, the monthly payment changes accordingly.
An ARM can be a good idea if your life is likely to change in the next few years — for instance, if you plan to move or sell the house. You can enjoy the ARM's fixed-rate period and sell before it ends and the less-predictable adjustable phase starts.
Some common mortgage indexes include the prime lending rate, the one-year constant maturity treasury (CMT) value, the one-month, six-month, and 12-month LIBORs, as well as the MTA index, which is a 12-month moving average of the one-year CMT index.
An ARM starts with a low fixed rate during the introductory period, which typically is three, five, seven or 10 years. When the introductory period expires, the interest rate changes regularly, based on a benchmark index.
The initial adjustment cap will vary and you should look at your terms of your loan in your note, but most lifetime adjustment caps are 5%. So if your start rate is 4%, and the lifetime cap is 5%, then the ceiling of your rate is 9%.
What Is a Mortgage Index? A mortgage index is the benchmark interest rate an adjustable-rate mortgage's (ARM's) fully indexed interest rate is based on. An adjustable-rate mortgage's interest rate, a type of fully indexed interest rate, consists of an index value plus an ARM margin.
What it means: Libor stands for London Interbank Offered Rate. It's the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in U.S. capital markets and can be found in The Wall Street Journal.
Most ARMs have caps of 5% or 6% above the initial interest rate. Example: If your loan has a 6% lifetime cap, your interest rate may only increase or decrease by a maximum of 6% for the life of the loan.
The interest rate a lender charges on a HELOC is based on an underlying index rate, which is a benchmark rate that reflects the general economy. Lenders add a markup, called a margin, to the index rate. For example: If the prime rate is 7.75% and the lender charges a 1% margin, the HELOC interest rate would be 8.5%.
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