Adjustment Period

Author:  Rob K. Blake        Published: July 24, 2008

Adjustment Period Defined

On an adjustable rate mortgage (ARM), the adjustment period is the time allotted between interest rate recalculation.

The most common adjustment period for convention ARMs is 1 year. So the adjustment period is 12 months meaning every 12 months the rate changes thereby changing the payment as well. The borrower will make those new payments based on the new rate for 12 months when it then repeat the process.

The periodic rate caps will limit most conventional loans by no more than a 2% increase every 12 months in this example. So even if the index rose by more than 2% in the last 12 months, the periodic rate cap will restrict the final rate calculation. If the index only rose by 1%, then rate will change by adding the 1% to the margin and that will be the rate for that adjustment period. 12 months later the recalculation will happen again.

A fairly recent ARM in use today is called a hybrid ARM where the loan is fixed for a set period after which the loan adjusts on periodic basis. For example, a 5/1 ARM is fixed for 5 years at the initial closed rate, then at the end of 5 year adjusts on a 1 year adjustment period. Many of these loans have a relatively new adjustment period associated with them. This new adjustment period called the “initial adjustment period”…mean the very first adjustment…was instituted to introduce it’s own initial adjustment rate cap. Many times this initial adjustment rate cap is equal to the lifetime rate cap…meaning at the very first adjustment the rate could max out.

Author: Rob K. Blake