Many adjustable-rate mortgages act as hybrid loan products and experience mortgage reset dates because they have a fixed interest rate for a certain period of time, such as three or five years. After that, the interest rate will fluctuate according to the underlying mortgage index and market rates. Let’s take a look at mortgage reset dates, how they work, and what they mean for you.
Definition and Examples of Mortgage Reset Dates
There are multiple types of adjustable-rate mortgages, but popular options contain a hybrid approach that combines two separate loans: the fixed-rate mortgage and the adjustable-rate mortgage. These home loans maintain a fixed interest rate for a specified amount of time, such as one, three, or five years. Once that time limit expires, however, the interest rate on the loan will change depending on the mortgage index and the market. The day on which that time limit expires is called the mortgage reset date.
Alternate name: reset period, adjustment period
Many home loans have multiple reset dates. The frequency at which your loan will reset is determined by the loan itself. The adjustment period for some loans can be as often as every month or as infrequent as once per five years. For example, let’s say you took out a 5/1 mortgage loan on June 1, 2021. For the first five years, the interest rate is fixed. On June 1, 2026, the interest rate will adjust. June 1, 2026, would be the mortgage reset date.
How Mortgage Reset Dates Work
Here’s another way to look at mortgage reset dates. Let’s say you and your partner went looking for a home a few years ago. After consulting with your lender, you decided to sign up for an adjustable-rate mortgage (ARM). Your income at the time made the lower payments of the ARM more appealing, and you had expected to earn more as time went on. Unfortunately, your salary never increased. In fact, you added a child to your family, and your finances became more precarious than they were when you first acquired the home loan. Now, the initial fixed-rate period of your ARM expires in a few months, and you’re worried about what your new monthly mortgage payment will be—and if you’ll be able to afford it. Although you won’t know your new interest rate and monthly payment until your mortgage reset date, you may be able to get a pretty good estimate by checking out the index your loan is based on. Higher rates on the index will correlate with higher interest rates on your loan; lower rates will correlate with a lower interest rate on your loan. Be sure to find out what the ARM margin is, too; this is the number of percentage points your lender adds to the index rate. Different lenders have different margins, such as two or three percentage points, and the margin rate is usually the same for the life of your loan. For example, if the margin is two percentage points and the index is 4%, your rate would be 6%. If the index rate adjusts down to 3% by your reset date, your rate would be 5%. Your mortgage reset date is not a secret. This information will be in your loan documents, although some lenders may also notify you when the date nears. The adjustment period of your mortgage will depend on your loan, but the most common reset date is once per year.
What Do Mortgage Reset Dates Mean for You?
Adjustable-rate mortgages may be a suitable option for homebuyers who don’t plan to stay in their home very long. If that’s you, you may find the lower introductory rate and monthly payment of an ARM especially appealing. However, it’s impossible to know the future and where you’ll be once the mortgage reset date arrives. Periodic adjustment caps limit what the interest rate can increase or decrease to during a mortgage reset date. Lifetime caps limit the increase in the interest rate during the life of your loan. Payment caps limit what your monthly payment may increase to during the adjustment period. For example, if your loan has a payment cap of 6.5%, your monthly payment can’t increase more than 6.5%. This cap applies even if interest rates increase.
