For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?

For an adjustable-rate mortgage, the index is a benchmark interest rate that reflects general market conditions and the margin is a number set by your lender when you apply for your loan. The index and margin are added together to become your interest rate when your initial rate expires. Margins and indexes are two of many terms that determine your monthly payment for an adjustable rate mortgage. It’s also important to understand caps, carryover, and other terms.