Explication Of Margin In Real Estate

Definition of "Margin"

Steve Davis, Real Estate Agent Realty Resource Connection

In commerce and business, margin as a general term is defined as by the difference between the amount of money spent on a product and the selling price of it. The margin usually appears as a percentage of net sales revenues. For example, a retail store pays $5 for supplier goods and sells them for $10. This means that the margin of sales is 50% on these products.

Margin in financial accounting has a slightly different meaning. In accounting, there are three income statements that appear as a percentage of sales revenue. Gross margin, net profit margins, operating margin used by companies to measure earning performances.

Margin as far as investment goes is a measurement that indicated a change between the purchase price and the selling price of an asset. This creates leverage which means that the investor has gain or loss margins based on the value of the asset at the time of selling compared to the time of buying.

Margin in real estate

Let’s explain the meaning of margin In real estate, the term margin is tied to adjustable-rate mortgages(ARM). The ARM allows borrowers to pay a fixed interest rate for a determined period of time, after which it changes. At the time of the loan approval, a margin is set. As explained before it is a percentage and it determines the maximum interest rate that the borrower can set for the entire duration of the loan.

This means that the interest rate cannot be higher than the index of interest rates plus the margin. The index of interest rates is like a benchmark or a guide for lenders that helps them set interest rates. For example, if the margin is set at 3 percent, it means that your interest rate charges for your loan can only go as high as 3 percent above the index of interest rates.