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The Margin

February 24, 2012

The margin is set by the lender and is the amount above the index that the interest rate can adjust at the time of adjustment. The result of the index plus margin formula is the new interest rate.

This represents the real interest rate of an ARM. Considering the real cost is important because it goes beyond the discounted rates that are offered on most ARM loans, especially those ARMs that are short-term. A discounted rate indicates that the points paid in conjunction with the loan artificially reduce the initial interest rate to attract borrowers. Looking at the equation that uses the index plus the margin gives what is known as the Fully Indexed Accrual Rate (FIAR). This gives a more accurate representation of the actual costs of the loan, rather than simply using the discounted rate.

The Lowest Margin Offers the Lowest Cost

                        Loan 1              Loan 2

Initial Rate         5.500%            5.500%

Index                4.875%            4.875%

Margin              2.500%           3.750%

New Rate         7.375%           8.625%

Every loan may offer a different margin. This is a critical part of analyzing the ARM. In the above example, all things are equal, except the margin. The margin is higher on Loan 2, which means that the FIAR, or the true rate of the loan, is higher on the second loan. This means that, regardless of what happens to interest rates, the customer who chooses Loan 2 will pay a higher interest rate over the life of the loan. This is true of any ARM.


First, Complete out a loan application on our website
-Go to
-Click on Apply Now at the top
-Scroll to the middle of the page and Click on 3. Full Application
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