U.S. Mortgage Index

What are the index and margin on an adjustable-rate mortgage?

Short answer

On an adjustable-rate mortgage, the index is a market interest rate that moves with general conditions, and the margin is a percentage the lender sets when you apply. After the initial rate period, the new rate is generally the index plus the margin, subject to any rate caps.

Full explanation

The index and the margin are the two numbers a lender uses to reset an after the introductory period ends.

The index is a published market rate that moves as broader conditions change. The lender chooses the index when you apply, and that choice generally does not change after closing. If the index rises, your payments can rise. If the index falls, payments may fall, but that is not true for every loan.

The margin is a number of percentage points the lender adds to the index. It is set in the loan agreement and does not change after closing. The CFPB notes that margins can vary widely by lender and can be negotiated in the same way a fixed rate might be negotiated.

Once the initial teaser rate expires, the fully indexed rate equals the index plus the margin, subject to any rate caps. Those later changes are based on the market, not on your personal finances. Caps, carryover, and other ARM terms also affect the payment. Compare the margin and caps when you shop, and review the Consumer Handbook on Adjustable Rate Mortgages if you are considering this loan type.

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