Receiving a Notice of Interest Rate Adjustment can be surprising, but it’s a standard part of loans with variable interest rates. Instead of worrying, think of it as an advance alert that helps you adjust your finances.
How Does an Interest Rate Adjustment Work?
For fixed-rate loans, your interest rate and monthly payment remain constant throughout the loan term. Variable-rate loans, however, adjust periodically based on market indexes.
Lenders calculate your new interest rate using two components:
- Index: A benchmark interest rate outside the lender’s control, like the Secured Overnight Financing Rate (SOFR). It reflects current market borrowing costs.
- Margin: A fixed percentage added by your lender to the index as their profit margin. This rate is fixed in your original loan terms.
The new rate = Index + Margin.
Your Notice of Interest Rate Adjustment will detail these numbers and show how your monthly payment changes accordingly.
What Information Is Included in the Notice?
According to the Consumer Financial Protection Bureau (CFPB), your notice will include:
- Current interest rate and monthly payment
- New interest rate and effective date
- The index and margin values
- Any applicable rate caps limiting increases (see Interest Rate Cap Structure)
- Contact info for your lender or a housing counselor
Who Receives These Notices?
Borrowers with:
- Adjustable-Rate Mortgages (ARMs): Typically fixed first, then adjust annually after an initial period. Learn more about ARMs.
- Home Equity Lines of Credit (HELOCs): Often variable-rate with adjustments potentially monthly. Read about HELOCs.
- Some private student or personal loans with variable rates.
What Should You Do When You Receive This Notice?
- Review it promptly: The notice is usually sent 60-120 days before the rate change (first ARM changes come with 210-240 days’ notice).
- Verify the figures: Check the index, margin, and adjusted rate match your loan agreement.
- Adjust your budget: Plan for the new payment amount and modify your spending as necessary.
- Explore refinancing: If the new rate causes payment hardship, consider refinancing to a fixed-rate loan for stability.
Frequently Asked Questions
Can I stop the interest rate from changing?
No. Variable-rate loans adjust as agreed in your contract. Refinancing to a fixed rate is the only way to avoid future adjustments.
How soon will I get the notice?
Federal law requires 210-240 days’ notice before the first ARM adjustment and 60-120 days before subsequent changes.
What if my rate goes down?
Your interest rate and payment can decrease if the underlying index falls, and you will still receive a notice.
For additional details on ARMs and how they function, visit our Adjustable-Rate Mortgage (ARM) glossary article. To understand your rights and protections, see resources from the Consumer Financial Protection Bureau (CFPB).
