What is the term for the difference between the interest rate and the index on an adjustable-rate mortgage?

The term for the difference between the interest rate and the index on an adjustable-rate mortgage is known as the margin. In adjustable-rate mortgages (ARMs), the interest rate is typically composed of two main parts: a benchmark index rate and a margin that is added to this index to determine the borrower's interest rate.

The margin represents the lender's markup over the index and is a critical component in calculating the overall interest rate for the borrower. For instance, if the index is at 3% and the margin is set at 2%, the total interest rate the borrower would pay would be 5%. This margin remains constant over the life of the loan, while the index may fluctuate, affecting the total interest rate at adjustment periods.

Understanding the role of the margin is essential for borrowers considering an adjustable-rate mortgage, as it affects the overall cost of the loan and can significantly impact their monthly payments as interest rates change over time.