What does the term 'margin' refer to in the context of adjustable-rate mortgages?

In the context of adjustable-rate mortgages (ARMs), the term 'margin' specifically refers to the lender's markup added to the index rate to determine the interest rate that a borrower will pay after the initial fixed-rate period ends. The margin is a fixed percentage, established at the time of the loan, and it represents the lender's profit above the index rate, which reflects prevailing market conditions.

When calculating the effective interest rate for the borrower, the index rate (which can fluctuate based on market interest rates) is combined with the margin. For example, if the index is at 3% and the margin is 2%, the borrower's interest rate would be 5%. This component is crucial for borrowers to understand, as it determines the overall cost of their mortgage once the loan adjusts after the initial fixed-rate period.

In contrast, additional fees associated with the borrowing process, the average market interest rates, and property assessments are not related to the calculation or definition of margin in adjustable-rate mortgages. These factors may influence the overall mortgage landscape but do not define what margin entails in this specific context.