What is an Adjustment Date

Adjustment date is the date on which financial changes happen to a contract or transaction. All parties involved in the sale will agree on the dates of adjustments. Many real estate deals will include adjustment dates. Adjustment date also refers to the time on which the interest rate changes in an adjustable-rate mortgage (ARM).

BREAKING DOWN Adjustment Date

The adjustment date refers to the agreed-upon time for the completion of calculations of specific charges due from the buyer and the seller during the sale of a home. Certain costs, such as property taxes, the transfer of utilities, the effective date of insurance, and interest charges on some loans have a basis on the adjustment date. During the real estate closing, this date will be the basis to determine the portion of the shared cost which is due from a seller and a buyer of a property

Adjustment dates are also the first day that interest will begin to accrue on a home mortgage. This day is the date of the disbursement of money to the involved parties. The adjustment date as the day of payment is vital because the buyer has the use of these funds, sometimes for several days before the final closing. Adjustment dates form the basis of the interest calculations on a mortgage which the lender may request at closing. To limit the amount due at the sale's settlement, a buyer should try to schedule the closing as close to the adjustment date as possible. 

Adjustment date in ARMs

An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. The ARM has an initial fixed-interest rate for a period, followed by scheduled changes in the rate charged. On a specified date, the rate will reset for a stated number of months or years. These new rates have a basis from a benchmark or index. Also, the new rate will have an additional cost, called an ARM margin. These two values will become the loan's fully-indexed interest rate which the underwriter determined from the borrower's credit quality at loan origination.

Typically, ARM descriptions have two numbers, such as a 2/28-ARM or a 5/1-ARM. The first number will always indicate the length of time for the application of the fixed-rate, but the meaning of the second number varies. 

  • A 2/28 ARM has a fixed rate for two years followed by a floating rate for the remaining 28 years. 
  • A 5/1 ARM would have a fixed-rate for five years, followed by a variable rate that adjusts every year. 

Also, the interest rate can increase or decrease with an adjustable-rate mortgage. Some ARMs will also have limits on the highest and lowest amount of interest rate change or charged on the note. These limits are known as rate caps.