Adjustment Frequency Details

Adjustment frequency, also known as the reset date, shows how often the interest rate of an adjustable-rate mortgage (ARM) – a mortgage that has an interest rate that varies regularly – modifies after its fixed-rate duration has ceased.

Usually, the adjustment frequency happens around once a year. Nevertheless, depending on the circumstances, it can happen every five years or up to once a month. The frequency at which this interest rate is modified can increase the interest costs considerably during the duration of the loan. Therefore, the debtor must be attentive to this mortgage factor when assuming his mortgage debt.

When the adjustable frequency happens once a year or less frequently, it is beneficial for the borrower, as the risk of being exposed to fluctuation movement of payment decreases. On the other hand, the more frequent the adjustable frequency of an adjustable-rate mortgage, the more financial risks the homeowner will face, as the mortgage payment can increase continuously before decreasing.

Example of Adjustment Frequency

Different kinds of adjustment frequencies have distinct consequences for the house owner. Here are two examples :

  1. The first one is a loan with a 4 year fixed-rate, with adjustment frequency every one year, therefore a 4/1 adjustable-rate mortgage (ARM). Considering that the initial fixed-rate will be 5% and the adjustment cap – the maximum interest rate that can be charged during a specific time of a loan or mortgage – will be 1%, it means that in the fifth year of the mortgage, the new rate for the borrower will be of 6% and will last the entire following year.
  2. In the case scenario where a borrower has a monthly adjustment frequency, on the other hand, such loan rates would increase much faster. The borrower would be forced to pay increasing variable-rates each month. Therefore, annual adjustment frequencies are much more beneficial to the homeowner.

Adjustment Frequency vs. Adjustable-Rate Mortgage (ARM)

The adjustment frequency, as explained previously, refers to how often an interest rate of an adjustable-rate mortgage changes after its fixed-rate period is over. In addition, it is important to know the meaning of adjustable-rate mortgage (ARM), a term that is profoundly connected to the adjustment frequency, and fundamental to understanding it.

The adjustable-rate mortgage (ARM), also known as variable-rate mortgages, is a kind of mortgage where the interest rate is a variable one, which oscillates during the whole period of the mortgage loan. This oscillation happens after the initial period where the interest rate fixed is over. The ARM caps limit the interest rates and payments to rise more than a total limit per year or during the whole duration of the loan. Also, the ARM can be a smart financial option for people who intend to pay their debt by a specific time, or for people who won’t be financially harmed when the interest rates are applied.

The adjustable-rate mortgage is demonstrated as two numbers. The first one shows how long the fixed-rate will be applied on the loan, and the second one demonstrates the variable-rate after the fixed-rate is done. For instance, a 4/2 ARM starts with a 4-year fixed-rate, which will be followed by a variable rate that adjusts every two years. Usually the initial fixed-rate lasts between three to ten years, and most mortgage loans generally have a 30-year duration.