WHAT IS AN Adjustment Interval
Adjustment interval is the amount of time between interest rate changes on an adjustable rate mortgage (ARM). Most ARMs have two adjustment intervals. The first interval is typically longer, lasting anywhere from three to 10 years, during which a fixed rate of interest and payment is established. This initial interval is followed by periodic adjustments to the interest rate, which typically occur every six months to a year.
BREAKING DOWN Adjustment Interval
Adjustment interval, also known as an adjustment period, refers to the amount of time between interest rate changes on adjustable rate mortgages (ARMs). With an ARM, also known as a variable-rate mortgage, the shorter the adjustment interval, the higher the financial risk for the homeowner. For example, if the adjustment interval for a mortgage is one month, a homeowner's mortgage payment could increase every month for five months or longer before it decreases again. This ties up more of the homeowner's income, and creates more risk as it increases the likelihood of default.
Consider a 3/1 ARM, in which three represents the initial period of time where the interest rate and payment remain fixed, while one denotes the subsequent adjustment intervals. In this example, the interest rate and payment remains the same for the first three years of the loan, after which it can adjust every year. In a 5/1 ARM the fixed rate holds for five years, followed by a variable rate that adjusts every year.
Why Adjustment Intervals Matter
Adjustment intervals or periods are related to the interest rate changes of adjustable rate mortgage (ARMs). The interest rate with this type of mortgage is applied on the outstanding balance and varies throughout the life of the loan. The interest rate resets based on a benchmark or index plus an additional spread, called an ARM margin.
Also called a variable-rate or floating rate mortgage, ARMs take a number of different forms. Most ARM loans are actually hybrid loans, combining different durations at different interest rates in ways that can offer advantages both to lenders and borrowers, depending on prevailing interest rate movements and the circumstances of an individual loan. As long as the loans meet the standards laid out in federal mortgage laws, mortgage lenders can structure ARM loans however they want. A mortgage calculator can be a useful tool in comparing different types of ARMs.
In contrast, a fixed-rate mortgage includes a fixed interest rate for the entire term of the loan. Generally, lenders offer either fixed, variable or adjustable rate mortgage loans with fixed-rate monthly installment loans being one of the most popular mortgage product offerings.