Which statement about the margin in ARM loans is true?

• A. The margin is the same as the rate cap.
• B. The index is not used to determine the rate.
• C. The margin changes with market conditions.
• D. The margin is a fixed percentage added to the index to determine the new rate.

Answer: (D)

In an adjustable-rate mortgage, the interest rate is made up of the index plus the margin. The index fluctuates with market conditions, while the margin is a fixed percentage set by the lender. Because the margin stays the same over the life of the loan, each new rate is determined by adding that fixed margin to the current index value. Rate caps are separate protections that limit how much the rate can move, but they don’t change the fact that the margin is fixed. So the statement that the margin is a fixed percentage added to the index to determine the new rate is correct.