DEFINITION of 'Reset Rate'
The new percentage of interest that a mortgagor must pay on the principal of an adjustable rate mortgage when the reset date arrives and the prescheduled interest rate change goes into effect. The mortgage contract explains when the rate resets and how the new rate is calculated. When the rate resets, the new interest rate may be higher or lower than the initial interest rate depending on market conditions.
BREAKING DOWN 'Reset Rate'
Adjustable rate mortgages have a fixed interest rate for an initial period that commonly ranges from one to five years. When this period ends, the interest rate is reset based on a market rate of interest using a benchmark such as the rate of one-year Treasury bonds or the London Interbank Offered Rate. The lender adds an additional percentage to that benchmark rate. The margin rate does not change, but the market rate does.