In an adjustable-rate mortgage, which component does not change from year to year?

• A. The index
• B. The payment
• C. The interest rate
• D. The margin

Answer: (D)

In an adjustable-rate mortgage, the interest rate is the sum of a market index and a fixed margin. The index can move up or down each year, which makes the rate and, often, the monthly payment change over time. The margin, however, is set at origination and stays constant for the life of the loan. Because the margin doesn’t change while the index can, the component that does not vary year to year is the margin. For example, if the index rises but the margin remains the same, the rate increases by whatever the index added, keeping the margin portion unchanged. Payments may fluctuate with rate changes (subject to caps or other terms), but the margin itself stays fixed.