Loan Officer Practice Exam

The portion of the ARM that cannot change and is used to compute the interest rate on an adjustable-rate mortgage is known as the?

1. margin

2. index

3. spread

4. cap

The correct answer is: margin

The margin is the correct answer because it represents the fixed amount added to the index to calculate the overall interest rate on an adjustable-rate mortgage (ARM). The index reflects the market conditions and can fluctuate, impacting the interest rates based on economic factors. However, the margin remains constant throughout the life of the loan, providing stability in how much additional interest is charged above the index rate. In contrast, the index varies with the market, and any changes in the index will directly affect the interest rate. The spread is sometimes used interchangeably with 'margin' in some contexts but generally refers to the difference between yields, not specifically tied to ARMs. A cap is a provision in an ARM that limits how much the interest rate can increase at each adjustment period or over the life of the loan, but it does not determine the interest rate itself. Therefore, understanding that the margin is what adds a predictable factor to the variable interest calculations is key.