What term refers to the lender's profit added to the index to determine the par rate or fully indexed rate?

The margin is the term that refers to the lender's profit added to the index to determine the par rate or fully indexed rate. In the context of adjustable-rate mortgages (ARMs), the par rate is comprised of the index rate, which fluctuates based on market conditions, and the margin, which remains constant throughout the life of the loan.

The margin typically reflects the lender's costs, profit margin, and overhead associated with originating and servicing the loan. This fixed addition to the index allows lenders to calculate an interest rate that compensates them while accommodating changes in the market. Therefore, when determining the fully indexed rate for an ARM, the index plus the margin gives a precise figure reflecting the borrower's cost of borrowing over time.

In comparison, the other terms represent different concepts in mortgage and financial contexts. The index specifically refers to the benchmark interest rate that the lender uses to calculate the interest rate on the loan, the spread can refer to the difference between two interest rates or yields, and yield typically pertains to the earnings generated and realized on an investment over a particular period. Understanding these distinctions helps clarify why margin is the appropriate term in this context.