Understanding Adjustment Periods in Adjustable Rate Mortgages (ARMs)§
An adjustment period defines how often the interest rate on an Adjustable Rate Mortgage (ARM) is adjusted. Typically, these intervals are one, three, or five years long, but some loans might have varied adjustment schedules.
Many lenders advertise ARMs using two numbers representing the terms’ durations, such as a 5/1 ARM. The first number, 5, indicates that the initial interest rate will remain fixed for the first five years. The second number, 1, signifies that the interest rate adjusts annually after the initial period.
For instance, in a 5/1 ARM, the mortgage’s interest rate will remain fixed for the first five years. At the beginning of year six, the interest rate adjusts, and from that point onward, it will continue to adjust every year.
Lenders tie these interest rate changes to specific financial indices. Common indices include Treasury securities or the national average cost of funds index.
Whether considering purchasing a home or refinancing, understanding the mechanics of the adjustment period in ARMs is crucial. It impacts how your monthly mortgage payments could fluctuate over the loan’s lifetime.
Related Terms: Fixed Rate Mortgage, Interest Rate Index, Treasury Securities, Mortgage Terms
