Lesson 5 of 25 · 6 min

ARM: index plus a margin

An ARM rate is an index plus a margin, the same two-part sum a securities line already uses.

An ARM rate is two numbers added. The index is a published market reference. The margin is the lender's spread. Track 1 lesson 13 writes this as index plus spread. This lesson does not re-teach that split. It names the mortgage words for the same two parts, and it shows the first reset as arithmetic.

ARM rate = index + margin

index: A published market reference. The lender does not set it.
margin: The lender's spread over that index. The mortgage word for Track 1 lesson 13's spread.
ARM rate: What the reset writes, before caps. The sum of the two parts.

Cairn Street Lending's 5/1 on the $248,900 book starts at 5.40 percent. That start rate is already a sum: index 2.65 percent plus margin 2.75 percent. At the first reset the index prints 3.90 percent. The uncapped rate is 3.90 percent + 2.75 percent = 6.65 percent. The margin did not move. The index did. The start rate is not in the reset at all, except as history.

A securities line often resets as soon as the index moves. An ARM waits for the date it wrote. The formula is the same. The cadence is not. Lesson 8 puts that cadence next to a home equity line. Lesson 6 puts caps on the 6.65 percent. This lesson is only the sum: two parts, one rate, and a start rate that was already that sum on day one.

The start rate is index plus margin at origination. The reset rate is index plus margin at the date. Same formula. Different prints of the index.

Key terms

Index: A published market reference the ARM is priced against. The lender does not set it.
Margin: The lender's spread over the index. The mortgage word for the spread Track 1 lesson 13 names.
Uncapped rate: Index plus margin at the reset, before any cap is applied. On this book, 6.65 percent.

Worked example

One start rate, one reset, same margin

Cairn Street Lending. Start rate 5.40 percent = index 2.65 percent + margin 2.75 percent. At the first reset the index prints 3.90 percent.

Start, as a sum: 5.40%
Index at first reset: 3.90%
Margin at first reset: 2.75%
Uncapped rate: 6.65%
What moved: The index, +1.25 points

The reset does not consult 5.40 percent. It adds the current index to the margin. That is Track 1 lesson 13 with mortgage names.

Check yourself

Start rate 4.85 percent = index 2.10 percent + margin 2.75 percent. At the first reset the index prints 3.40 percent. What is the uncapped rate, and which part moved?

ARM index plus margin is the same two-part rate Track 1 lesson 13 writes as index plus spread. Open Variable rates: how index plus spread works →

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.