In an ARM, what are the rate adjustment index and margin?

• A. The index is the market rate the loan is tied to; the margin is a fixed percentage added to the index to determine the note rate; rate caps may apply.
• B. The margin changes monthly.
• C. Rate caps are never used in ARM.
• D. The note rate is always equal to the index.

Answer: (D)

In an ARM, the rate is determined by tying a market index to a fixed margin. The index reflects current market rates and can move up or down over time, while the margin is a fixed percentage added to that index. The borrower’s note rate is the sum of the index and the margin, so it changes as the index changes. Rate caps may also apply to limit how much the rate can adjust at each reset and over the life of the loan. If the note rate were simply the index value, it would ignore the fixed margin lenders use to determine the actual rate.