What Is a Reset Date?
A reset date is a point in time when the initial fixed interest rate on an adjustable-rate mortgage (ARM) changes to an adjustable rate. This date is commonly one to five years from the start date of the mortgage. After the initial reset date, the interest rate becomes variable and changes according to the terms established in the borrower’s credit agreement.
In some ARM loans the reset date may refer to multiple dates throughout the duration of the loan when the borrower’s interest rate is reset. Multiple reset dates can occur in loans that reset on a specified schedule, usually once per year, while in the variable rate portion of the loan.
Adjustable-rate mortgages typically have 3, 5, or 7 years at a fixed rate before entering a floating rate period on the reset date.
How a Reset Date Works
The reset date is an important feature of adjustable rate mortgages. Adjustable rate mortgages offer borrowers some of the benefits of both a fixed rate and variable rate product. The reset date provides a defined point in time when the investor can expect their rates to begin changing with the market environment. It can also refer to a specified timeframe when the loan resets throughout the variable rate duration.
ARMs are a popular type of mortgage product offered by traditional lenders. They can be an alternative to standard conventional mortgage loans requiring fixed rates throughout the loan’s duration. Typically, investors will choose ARM loans because they believe rates will fall in the future.
- For adjustable-rate mortgages, the reset date will be the first day that the mortgage begins to follow an adjustable (floating) market rate.
- On the reset date, the rate is set according to a predetermined index, plus a spread. Adjustable-rate mortgages are typically indexed to LIBOR or the U.S. Treasury rate.
- Amortization structures for adjustable rate mortgages are usually the same as fixed-rate loans—the only change is to the rate of interest.
Types of Reset Dates
Adjustable rate mortgages are structured with fixed rate interest in the first few years of the loan followed by a variable rate period after that. In the fixed rate portion of the loans, borrowers pay a fixed rate with a standard amortization schedule. Payments are standardized to include principal and fixed rate interest.
Once an investor reaches the reset date, then the remainder of the loan is based on a variable rate. In the variable rate portion of the loan a borrower’s interest rate will be charged based on a fully indexed rate rather than a fixed rate.
In the initial approval of an ARM loan the underwriter will determine an ARM margin that the borrower will be charged based on their credit profile and the terms of the loan. The ARM margin is added to an indexed rate after the reset date to determine the borrower’s variable rate loan interest.
In variable rate loans the underwriter will also determine an indexed rate. The indexed rate is typically the bank’s prime rate, however, it may also be benchmarked to the London Inter-Bank Offered Rate (LIBOR) or a U.S. Treasury rate. In the variable rate portion of the loan a borrower’s interest is equal to the indexed rate plus their ARM margin.
The variable rate portion of an ARM loan will change based on the structuring of the loan. Some loans are structured to reset the variable rate once per year while others have an open variable rate that changes with the market at any time. Lenders have sophisticated technology that allows them to build amortization schedules for ARM loans encompassing both fixed and variable rate payments. A borrower’s amortization schedule will be adjusted according to the loan’s variable rate and monthly installment payments will be calculated accordingly.
ARM Loan Products
A 5/1 ARM loan will have a reset date beginning five years after the initial loan. This loan would pay fixed rate interest for five years and then reset to a variable rate, with subsequent reset dates scheduled annually.
A 2/28 ARM loan would have a variable reset date two years after the initial loans. This loan would begin paying variable rate interest on the two-year reset date with variable rate changes occurring at any time over the remaining 28 years based on changes to the underlying indexed rate.