In an adjustable-rate mortgage (ARM), the margin is a fixed percentage added to a changing index rate, such as LIBOR or the U.S. Prime Rate, to determine the borrower’s interest rate. Unlike a fixed-rate loan, an ARM adjusts periodically, often annually. The margin, set in the loan agreement, reflects the lender’s profit and operational costs. At each adjustment, the interest rate is calculated by adding the margin to the current index rate. For example, if the index rate is 3% and the margin is 2%, the interest rate would be 5%. Other factors like caps limit rate changes over the loan term.