An adjustable-rate mortgage (ARM) blends fixed and variable interest rate periods. The “rate adjustment interval” is the length of time between each allowed change in your interest rate once the initial fixed period expires. For example, in a 5/1 ARM, the “5” represents five years of a fixed rate, and the “1” indicates the rate can adjust once every year thereafter.
During each adjustment, your lender recalculates your new interest rate by adding a fixed margin to a financial index such as the Secured Overnight Financing Rate (SOFR). This new rate remains in effect until the next scheduled adjustment, determined by your rate adjustment interval.
Understanding this interval is essential for budgeting because it impacts when and how often your monthly mortgage payments may change. Some ARMs adjust annually, while others, like a 5/6 ARM, adjust every six months, potentially causing more frequent payment fluctuations.
Additionally, ARMs include rate caps to protect borrowers from severe increases. A periodic adjustment cap limits how much your rate can rise or fall at each interval, while a lifetime cap restricts the total increase over the life of the loan. These caps provide a degree of predictability despite potentially changing market rates.
To illustrate, consider Sarah’s 7/1 ARM: she enjoys a fixed rate for seven years, after which her interest rate can change once every year based on market conditions, until the loan concludes. This schedule helps her prepare financially for future rate changes.
For more detailed information about adjustable-rate mortgages and related terms, see our glossary entries on Adjustable-Rate Mortgage (ARM) and Lifetime Adjustment Cap.
Understanding your rate adjustment interval helps you anticipate when your payments may vary and plan accordingly to manage your mortgage effectively.
Sources:
- Consumer Financial Protection Bureau: Adjustable-Rate Mortgages (https://www.consumerfinance.gov/owning-a-home/explore-rates-mortgage-loans/adjustable-rate-mortgages/)
- Investopedia: What Is an Adjustable-Rate Mortgage (https://www.investopedia.com/terms/a/arm.asp)
- NerdWallet: How an Adjustable-Rate Mortgage (ARM) Works (https://www.nerdwallet.com/article/mortgages/arm-adjustable-rate-mortgage)
