An adjustment period is just one of the confusing aspects of a mortgage with an adjustable rate. And if you are confused do not feel bad.

Most originators have trouble figuring it out too!

Adjustment Period Definition

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. The adjustment period is 12 months meaning every 12 months the rate changes thereby changing the payment as well. So your payment stays the same until the 12th month when it adjusts.

Then you 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.

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