Adjustment Frequency

Adjustment Frequency

Investopedia / Theresa Chiechi

What Is an Adjustment Frequency?

Adjustment frequency refers to rate at which the interest rate of an adjustable-rate mortgage (ARM) is reset once the initial, fixed-rate period has expired.

The frequency can significantly add to the interest costs over the life of a loan. A borrower should be aware of this component of their mortgage prior to closing.

Key Takeaways

  • Adjustment frequency refers to the rate at which the interest rate of an adjustable-rate mortgage (ARM) is reset once the initial, fixed-rate period has expired. 
  • The adjustment frequency can significantly add to interest costs over the life of a loan, so borrowers should be aware of this mortgage component prior to closing.
  • Adjustment frequency is most typically set at one adjustment per year.
  • Adjustment frequency is different from the adjustment rate, which represents the new interest rate that you’ll pay on an ARM after the rate adjusts.

Understanding Adjustment Frequency

Adjustment frequency is an important but potentially overlooked feature of any adjustable-rate mortgage (ARM). Each ARM features several key variables. These mortgages involve an introductory period during which the interest rate is fixed, followed by a second phase in which the rate periodically moves to reflect prevailing market rates.

Market rates are reflected in an index rate that is identified in the initial mortgage agreement. Initial periods tend to range from three to 10 years. Rate adjustments are limited by caps on the initial and subsequent adjustments. Each ARM will tend to have an absolute rate cap that governs the rate at any point in the life of the loan contract.

Adjustment frequency is most typically set at one adjustment per year. In general, a longer period between rate modifications is more favorable to the borrower. The less often the rate is adjusted, the less often the borrower is exposed to the risk of upward movement in the chosen index.

It is important to note that the initial rate of an ARM is typically below the rate of a traditional 30-year mortgage. This helps to attract borrowers to the loan. When adjustments are made more frequently, the lender is able to bring the rate of the loan in line with prevailing rates more quickly.


The only way to avoid a rate adjustment with an ARM is to refinance into a new, fixed-rate loan.

Adjustment Rate vs. Frequency

Adjustment frequency is the rate at which your ARM’s interest rate adjusts periodically. Adjustment rate represents the new rate that you’ll pay for an ARM after each subsequent adjustment period. So again, this may be higher or lower than the initial interest rate associated with an ARM, depending on which way the index or benchmark rate has moved.

As mentioned, ARMs come with built-in rate caps that prevent your rate from increasing unchecked. There are two types of caps: Annual caps and life of the loan caps. The annual cap limits the amount that your rate can change in any given year during the loan term. The life of the loan cap establishes the minimum and maximum rates that you’ll pay for the life of the loan.


Interest-only adjustable rate mortgages allow you to make interest-only payments during the initial loan period, but these payments will not reduce the principal on the loan.

What Is the Best Adjustment Frequency?

Generally speaking, a longer adjustment frequency is better for homeowners because it means fewer potential changes to your loan’s interest rate. An ARM whose rate adjusts monthly, for example, could cost you more in interest over the life of the loan compared to an ARM that only adjusts once either every year or every five years.

The best adjustment frequency for an ARM is ultimately one that you can afford, based on your home-buying budget. If you have consistent, stable income and interest rates are generally low across the board, then more frequent rate adjustments may not be as burdensome to your budget. On the other hand, if your monthly payments are fluctuating month over month or year over year, then that could make it more difficult to keep up with your loan obligations.


It’s important to be cautious of payment option ARMs, which may allow you to pay only a minimum amount each month, as this can result in negative amortization.

Adjustment Frequency Example

To demonstrate the consequences of different adjustment frequencies, consider a 5/1 ARM with an initial rate of 3% and an adjustment cap of 1%. This is an ARM that will have its first adjustment after five years, and subsequent adjustments once a year after the fifth year.

Assume that during the five-year initial period, interest rates have climbed to the point that, at the first adjustment point, prevailing rates are at 6%. This results in a new rate of 4% for the borrower in the sixth year of their mortgage, with another adjustment to come at the end of that year.

Compare this scenario to a loan with a monthly adjustment frequency. Such a loan would only take three months to climb to 6%. Assuming that the index rate remains high, the borrower would be forced to pay a 6% rate for six months, while the borrower in the first example would remain at 4% for the entire year. A borrower in the first example would benefit from significant savings.


Using an online mortgage calculator can help you to estimate your total interest costs if you were to choose a fixed-rate home loan.

What is adjustment frequency?

Adjustment frequency is the rate at which the interest rate on an adjustable rate mortgage (ARM) increases or decreases in tandem with changes to its underlying benchmark rate. A typical adjustment frequency for ARMs is one year, though some can adjust monthly or every few years instead.

What is a good adjustment frequency?

A good adjustment frequency is one that allows you to retain some predictability with regard to your monthly mortgage payments and the interest rate that you’ll pay. Fewer adjustments mean fewer changes to your loan’s interest rate and payment, while more frequent adjustments could significantly alter your loan costs over time.

How often does an ARM adjust?

The adjustment frequency of an ARM can vary based on the loan terms. A typical ARM structure is 5/1, in which the homeowner pays one fixed rate for the first five years, followed by an annual rate adjustment. Other ARM structures include 3/1, 7/10, and 10/1.

Article Sources
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  1. MyHome by Freddie Mac. “How It Works: Adjustable Rate Mortgages (ARMs).” Accessed Oct. 19, 2021.

  2. Consumer Financial Protection Bureau. “With an Adjustable Rate Mortgage (ARM), What Are Rate Caps and How Do They Work?” Accessed Oct. 19, 2021.

  3. U.S. Department of Housing and Urban Development. “Adjustable Rate Mortgages (ARM).” Accessed Oct. 19, 2021.