ARM Reset

An Adjustable Rate Mortgage Reset takes place immediately after the fixed term on your Adjustable Rate expires.  These terms will be described in more detail in the Adjustable Rate Mortgage loan section.  The rest takes a look at the index your current ARM product is tied to; typically, either the Libor index or Ten year Treasury index rate.  Whatever the index rate is will be the base rate used in the calculation for the new interest rate charged to your loan.  It would be ideal to use only those index rates, but your loan program also requires the addition of a margin which is basically the mark up rate added to the index to obtain your new note rate.  This adjustment will take place multiple times, depending on what type of Adjustable Rate Mortgage you get.

The rate reset will have a cap tied to the rate, thus preventing your new rate to exceed the current cap rate.  The Cap will normally be 1% above your previous rate and will only adjust on average once a year.  These ARM resets can be aggressive but I will not describe these in this section; instead, you can find out more by going to the Subprime loan section to learn about those types of adjustments.

Most people do not realize that the Adjustable rate Mortgage reset can go down, however, in recent years the only direction these loans have gone is up.  You should always compare the margin and attempt to get the lowest margin available, which will ensure that if and when the rate does adjust it will be a reasonable adjustment.