In essence, the principal balance of the loan increase rather than decreases. These indexes can be a bundle or average of many interest rates or they may be specific in nature. The indexes move in tangent with other short term interest rate debt instruments. The margin of an ARM is the spread indicated as a percentage that is combined with the index to create the rate of interest on ARMs. The margins remain fixed for the term of the loan and are not impacted by the financial markets and movement of interest rates.
Lenders use a variety of margins depending upon the loan program and adjustment periods.
The interest rate, also known as the fully indexed rate, is the combination of the index plus the margin. The adjustment periods are outline in the mortgage note and remain fixed for the life of the loan. Adjustment periods can range from a month to 7 years. Most ARMs have adjustment periods of 6 months to 1 year. Before the interest adjustment occurs, lenders notify borrowers of payment and interest rate changes.