An adjustable-rate mortgage (ARM) can offer a fixed interest rate for an initial period, followed by a rate that may change over time. If you have an ARM or are considering one, one of the most important questions to answer is simple: when can my mortgage rate change?
Your ARM documents establish the adjustment schedule, including how long your initial rate remains in effect and how frequently the rate can change afterward. Your mortgage servicer will also generally send advance notice before an adjustment affects your payment.
Understanding the fixed period, adjustment frequency, index, margin, and rate caps can help you prepare for potential changes instead of being surprised by a new monthly payment.
What Is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage is a home loan with an interest rate that can change according to the terms of the mortgage. Unlike a fixed-rate mortgage, where the interest rate remains the same for the entire loan term, an ARM typically has an initial period during which the rate is fixed, followed by an adjustable period.
Once the adjustable period begins, your interest rate may increase or decrease based on the loan's index, margin, adjustment schedule, and applicable rate caps.
ARMs can be useful for certain borrowers, but they also introduce uncertainty because future interest rates and payments may be different from the initial terms.
How Do You Read an ARM Loan Structure?
ARM names provide information about how the mortgage works. However, you should always verify the exact adjustment schedule in your loan documents rather than relying on the name alone.
For example, a 5/6 ARM may have an initial interest rate that remains fixed for five years and then adjusts every six months. A 7/6 ARM may remain fixed for seven years before adjusting every six months.
Other ARM structures can use different adjustment periods. The Consumer Financial Protection Bureau notes that some ARMs adjust annually after the initial fixed period, while others can adjust more or less frequently.
The important information to identify is:
- How long your initial interest rate is fixed
- When the first adjustment can occur
- How frequently adjustments can occur afterward
- Which index your loan uses
- The margin added to the index
- The rate caps and any applicable rate floor
How Will I Know When My ARM Rate Will Change?
Your mortgage documents should identify when the initial fixed-rate period ends and when subsequent adjustments can occur. If you already have an ARM, start by reviewing your closing documents and the Adjustable Interest Rate table.
Your mortgage servicer also generally must provide advance notice before an ARM adjustment affects your payment.
According to the Consumer Financial Protection Bureau, when an ARM is approaching its first reset, the required notice is generally sent approximately seven to eight months before the first payment at the adjusted rate is due.
For later adjustments that change the payment, borrowers are generally notified approximately two to four months before the first payment at the new level is due. Federal rules contain exceptions and different timing requirements for certain types of ARMs.
The notice should provide important information about the adjustment, including the current and new interest rates or an estimate when appropriate, the current and new payment amounts, and the date the first new payment is due.
How Is Your New ARM Interest Rate Calculated?
Once the introductory period ends, an ARM rate is generally determined using two important components: the index and the margin.
- Index: A benchmark interest rate that changes with broader market conditions.
- Margin: A set number of percentage points established by the lender and included in your loan agreement.
The basic calculation is:
Index + Margin = Fully Indexed Rate
The actual rate applied to your mortgage is also subject to the rate caps and other terms in your loan agreement.
For example, assume the applicable index is 4 percent and your mortgage has a 2.5 percentage point margin. The fully indexed rate would be 6.5 percent. However, if your adjustment cap prevents your rate from moving directly to 6.5 percent, the cap would limit the adjustment according to your loan terms.
What Is the ARM Index?
The index is the variable part of an adjustable-rate mortgage calculation. It moves based on broader financial market conditions rather than changes to your personal credit or financial situation after closing.
Your loan documents identify the specific index used for your mortgage and how it is applied when the rate adjusts.
If the applicable index rises, your ARM rate may rise at an adjustment. If the index falls, your rate may decrease, depending on your mortgage terms, caps, floor, and other applicable provisions.
Knowing which index your mortgage uses can help you understand why your rate is changing, but watching the index alone will not necessarily tell you your exact future rate because the margin and contractual limits must also be considered.
What Is the Margin on an ARM?
The margin is the number of percentage points your lender adds to the applicable index when calculating the fully indexed interest rate.
Unlike the index, which changes with market conditions, the margin is generally established in your loan agreement and does not change after closing.
For borrowers shopping for an ARM, comparing margins can be important. Two mortgages could offer similar introductory rates but have different margins, rate caps, and long-term costs once the adjustable period begins.
This is one reason borrowers should compare the complete ARM structure rather than choosing a loan based only on the initial interest rate.
What Are ARM Rate Caps?
Rate caps limit how much the interest rate can change. The exact caps depend on your mortgage agreement.
There are three important types of ARM caps to understand:
- Initial adjustment cap: Limits how much the rate can change at the first adjustment after the initial fixed period.
- Subsequent adjustment cap: Limits how much the rate can change during later adjustment periods.
- Lifetime adjustment cap: Limits how much the rate can change over the life of the mortgage.
Some ARMs may also have a floor that limits how low the interest rate can fall.
Rate caps are particularly important because the fully indexed rate could otherwise move considerably when market rates change. Your caps determine how much of that movement can actually be reflected in your mortgage rate at a particular adjustment.
Will Your Monthly Payment Change When Your ARM Rate Changes?
For most ARMs, the monthly principal and interest payment is recalculated when the interest rate adjusts. If your interest rate increases, your required principal and interest payment will generally increase. If the rate decreases, the payment may decrease, subject to the terms of the mortgage.
The amount of the payment change depends on factors such as the new interest rate, outstanding loan balance, remaining loan term, and loan structure.
Your total monthly mortgage payment can also change for reasons unrelated to the ARM rate. If your lender maintains an escrow account, changes in homeowners insurance premiums or property taxes can affect the total payment even while your mortgage interest rate remains unchanged.
This distinction can be especially relevant for Florida homeowners, where property insurance costs may materially affect the total housing payment.
Where Can You Find Your Next ARM Adjustment Date?
If you already have an ARM and are unsure when it will adjust, several documents and resources can help.
- Review your original mortgage and closing documents
- Look for the Adjustable Interest Rate table in your disclosures
- Review notices and statements from your mortgage servicer
- Check your mortgage servicer's online account information
- Contact your servicer and ask for the next adjustment date
Your loan documents are particularly important because they contain the contractual terms governing your mortgage.
Do not assume your ARM works the same way as another homeowner's ARM. The fixed period, adjustment frequency, index, margin, caps, and floor can differ from one mortgage to another.
What Should You Do Before Your ARM Adjusts?
If your first adjustment is approaching, review the expected payment as soon as you receive the required notice.
Consider how the new payment fits your current budget and whether you would remain comfortable if future adjustments caused the rate to increase further.
You can also review your options before the adjustment occurs:
- Prepare your budget for the expected payment change
- Review your ARM's index, margin, caps, and adjustment frequency
- Determine the highest rate and payment permitted under the loan terms
- Compare current refinance options if appropriate
- Consider how long you expect to keep the property
- Contact your mortgage servicer if you do not understand the adjustment notice
Do not assume you will automatically be able to refinance before your ARM adjusts. Refinancing requires a new mortgage application and is subject to available rates, property value, credit, income, assets, equity, and applicable underwriting requirements.
Should You Refinance Before an ARM Rate Adjustment?
Refinancing an ARM into a fixed-rate mortgage may be worth considering if you want a more predictable interest rate and monthly principal and interest payment.
However, refinancing is not automatically the best choice simply because an adjustment is approaching.
Compare your expected ARM rate with available refinance options and consider the new interest rate, closing costs, loan term, monthly payment, loan balance, and how long you expect to keep the mortgage.
If your ARM is adjusting downward or remains competitive with available fixed-rate options, refinancing may offer little financial benefit. If the expected payment is increasing significantly and you plan to keep the home for several years, evaluating fixed-rate alternatives may make more sense.
The right decision depends on the actual numbers available when your adjustment date approaches.
Is an ARM a Good Choice for Florida Homebuyers?
An ARM can be appropriate for some Florida homebuyers, but the decision should be based on more than the introductory rate.
A borrower who expects to sell the property within a relatively short period may value the initial fixed-rate period. Other borrowers may prefer a fixed-rate mortgage because they want more predictability over the long term.
Before selecting an ARM, consider whether you could afford the payment if the interest rate increases to the maximum permitted under the loan terms.
The Consumer Financial Protection Bureau specifically cautions borrowers against assuming they will definitely be able to sell or refinance before the rate changes. Home values, mortgage rates, employment, income, credit, and personal circumstances can all change.
Questions to Ask Before Choosing an ARM
If you are comparing an adjustable-rate mortgage with a fixed-rate mortgage, ask your lender these questions before making a decision:
- How long is the initial rate fixed?
- When can the interest rate change for the first time?
- How often can it change afterward?
- Which index does the ARM use?
- What is the margin?
- What are the initial, subsequent, and lifetime rate caps?
- Is there a minimum interest rate or floor?
- What is the highest possible interest rate?
- What could the monthly payment become at the maximum rate?
- How does this ARM compare with a fixed-rate mortgage available to me?
Understanding these details before closing can make it much easier to evaluate the potential risks and benefits of an ARM.
The Bottom Line
You do not have to guess when your adjustable-rate mortgage will change. Your mortgage documents establish the adjustment schedule, and your mortgage servicer generally must provide advance notice before an adjustment affects your payment.
When evaluating an ARM, pay attention to more than the introductory interest rate. Understand the fixed period, adjustment frequency, index, margin, rate caps, floor, and maximum potential payment before committing to the loan.
If you already have an ARM, review your documents and servicer notices well before the next adjustment. That gives you time to prepare for the new payment and evaluate refinancing or other options if appropriate.
Loan Wolf Lending can help Florida homeowners and homebuyers compare adjustable-rate and fixed-rate mortgage options or review potential refinancing strategies. Call 754-755-3075 to discuss your mortgage goals and available financing options.
Please note: This information is provided for educational purposes and is not a commitment to lend or extend credit. ARM structures, adjustment schedules, indexes, margins, caps, rates, and underwriting requirements vary by loan program and lender. Mortgage rates and program requirements are subject to change.