What is the term for the difference between the index and the interest rate charged to a borrower with an ARM?

The term that defines the difference between the index and the interest rate charged to a borrower with an Adjustable Rate Mortgage (ARM) is known as the margin. This margin represents the lender's profit and risk in addition to the base index that is used to calculate the interest rate on the loan.

In an ARM, the interest rate is typically composed of two parts: the index, which is a benchmark that reflects broader economic conditions (such as Treasury rates or LIBOR), and the margin, which is a fixed percentage added by the lender. The total interest rate that a borrower pays is thus the index rate plus this margin.

Understanding the margin is important for borrowers because it can significantly affect the overall cost of the mortgage over time as interest rates fluctuate. It helps borrowers see how lenders determine the rates they may end up paying as market conditions change. This concept is fundamental to navigating ARM products effectively, making it essential knowledge for anyone involved in real estate and mortgage services.