Does the Margin Affect the APR on a Loan?
- "Margin" is a term that reflects the amount of a lender's profit and overhead. It's a component in every loan. It may vary from week to week and is controlled by the lender and perhaps their investors, but the margin is fixed when the interest rate is locked. In some types of loans, the borrower has to ask the lender what the margin value is. However, in an adjustable-rate mortgage, it's disclosed in the loan documents.
- An ARM consists of two components—an index and a margin. The index is a published economic indicator that's outside the control of the lender. The margin is added to the index to yield the fully indexed rate of the ARM. The index varies over time, so the interest rate for the ARM can vary at each adjustment period, but the margin stays the same for the life of the loan. For example, if the index is 4 percent and the margin is 2 percent, the borrower's starting interest rate is 6%.
- Loan charges consist of more than just interest and margin. There are all kinds of fees that can be added to the closing costs of a loan and a knowledgeable borrower may be able to negotiate the removal of some of these "nuisance" financing charges. A financing charge can be considered a fee that you would not be assessed if you were making a cash purchase. Some examples of financing charges are: credit report, points, lender's attorney, document prep and lender's title insurance.
- The APR includes the note rate, margin and financing charges. The federal Truth-in-Lending Act requires that the APR disclosure form be sent to the borrower within three business days after the lender or loan originator receives the signed mortgage application. Because financing charges differ among lenders, this allows a consumer to better compare lender quotes. For example, one lender may quote a 5 percent interest rate, but the APR on the loan is 6.5 percent. Another lender may offer a loan at 5.5 percent interest, but the total APR is only 6 percent. The interest rate for the second lender is higher, but the financing charges are lower, so it's probably the better deal for the borrower.
