What does the term 'margin' refer to in an adjustable-rate mortgage?

In the context of an adjustable-rate mortgage, the term 'margin' specifically refers to a fixed percentage that is added to the index rate to determine the interest rate for the mortgage. The index rate fluctuates based on the market, and the margin remains constant throughout the life of the loan. This margin is crucial because it defines the lender's profit over the index and directly affects the borrower’s overall interest cost.

Understanding how the margin works allows borrowers to anticipate potential changes in their mortgage payments as index rates change. It is important to note that the margin does not include the principal amount of the loan, nor does it represent the total interest accrued or any fees charged by the lender. Thus, grasping this definition is vital for those navigating adjustable-rate mortgages.