When your ARM adjusts: the new rate, and what to do before the change date
A lot of adjustable-rate mortgages written between 2019 and 2021 are reaching their first reset now. The notice that arrives months ahead tells you the new rate. Here is how that rate is built, where it goes at the adjustments after this one, and how to weigh staying against refinancing while there is still time to choose.
An ARM holds its starting rate for a fixed period, commonly five, seven or ten years, and then resets on a schedule written into your note. A five-year ARM that closed in 2021 reaches its first adjustment in 2026. If the starting rate was under 3%, the reset is the first time the loan has felt the rate environment of the last few years.
None of it is a surprise to the lender, and it does not have to be one to you. The rules for how the new rate is set were fixed the day you signed, and federal rules require your servicer to show you the numbers well before the change.
The notice is the countdown
Before the first adjustment, your servicer has to send a notice at least 210 and no more than 240 days before the first payment at the new rate is due. That is seven to eight months of lead time. The notice has to include:
- The index your loan uses and your margin, with an explanation that the margin is added to the index.
- The limits on how far the rate can move, at each adjustment and over the life of the loan.
- Your current and new rate and payment. If the new figures are estimates, the notice says so.
- The schedule of future adjustments, and whether a prepayment penalty applies.
- Your alternatives, including refinancing, selling, a loan modification or forbearance, with counseling contacts.
Before each later adjustment, a shorter notice arrives 60 to 120 days ahead. If you cannot find either one, the same terms are in your note under the section on interest rate and payment changes.
How the new rate is built
Four pieces, applied in order:
- The index, taken as of a lookback date, usually 45 days before the change date. That delay is why the rate in your notice is close to final.
- Plus the margin, a fixed number of points set at closing. It never changes.
- Rounded to the nearest one-eighth of a percent. The result is the fully indexed rate.
- Limited by the caps and the floor. The first-adjustment cap limits the first move, the periodic cap limits each move after that, and the lifetime cap is measured from your starting rate. On conventional ARMs the floor is the margin.
A worked example, using a conventional 5/6 SOFR ARM from 2021: $400,000 balance, 25 years left, starting rate 2.75%, margin 2.75%, caps of 2 points at the first adjustment, 1 point after that, and 5 over the life of the loan. With the 30-day average SOFR near 3.75%, the fully indexed rate is 6.50%. The first-adjustment cap allows only a 2-point move, so the new rate is 4.75%.
Those caps are the standard Fannie Mae terms for a 5/6 SOFR ARM. Jumbo and portfolio ARMs, and loans written on LIBOR, often carry different ones, with 5/1/5 and 5/2/5 both common, so the caps on your own note are the ones that count.
The first adjustment is usually not the last increase
When the cap holds the rate below the fully indexed rate, the gap does not disappear. It closes at the next adjustments, one periodic cap at a time. On the example above, with the index staying where it is:
| When | Rate | Principal and interest |
|---|---|---|
| Today | 2.75% | $1,845 |
| First adjustment | 4.75% | $2,280 |
| Six months later | 5.75% | $2,513 |
| Twelve months later | 6.50% | $2,691 |
That is an increase of about $846 a month inside one year, even though the notice for the first adjustment shows only the first step. A 7/6 or 10/6 ARM carries a 5-point first cap, so on the same numbers it would move to 6.50% in a single step.
The ceiling is the starting rate plus the lifetime cap: 7.75% here, or about $3,021 a month on the same balance and term. The index is unlikely to go there. The number is still worth knowing before you decide.
Which index your loan uses now
- 30-day average SOFR. Conventional ARMs written from 2021 on. Adjusts every six months after the fixed period.
- One-year Treasury (constant maturity), usually the weekly average. VA ARMs, many FHA ARMs and older conventional loans. Adjusts once a year.
- Former LIBOR loans. LIBOR ended in 2023. Consumer loans tied to it moved to a replacement index, the Refinitiv USD LIBOR Consumer Cash Fallback, which already includes the adjustment for the switch. Your notice names it and gives its value.
The ARM adjustment calculator fills in today’s SOFR and Treasury values automatically and runs the whole path, including a side-by-side with refinancing. The broader mechanics of the plans and caps are in how adjustable-rate mortgages work.
Your options before the change date
Keep the loan. If the fully indexed rate is at or below what a refinance would cost, or you expect to sell within the next year or two, the adjusted ARM may still be the cheaper loan. Watch the periodic steps, not only the first one.
Refinance into a fixed rate. This trades the uncertainty of the later adjustments for a known payment, at today’s pricing plus closing costs. Compare the two over the time you plan to keep the loan, counting closing costs and the balance still owed at the end, not the monthly payment alone. A new 30-year term lowers the payment partly by stretching the debt, and that is not the same as saving money.
Refinance into another ARM. A new fixed period at current pricing. It can make sense on a short horizon, and it puts the same decision in front of you again later.
Pay principal down before the reset. An ARM re-amortizes at each adjustment, so extra principal paid now lowers the payment the new rate is applied to. It does not change the rate.
Sell. If a move was coming anyway, the adjustment may simply set the date.
Timing a refinance
The notice gives you seven to eight months. A refinance usually takes 30 to 45 days to close, and pricing can be locked for a set period while it does. That leaves room to watch the market, but not unlimited room, and waiting past the first reset means paying at least one stretch at the adjusted rate.
I would price both sides as soon as the notice arrives, while every option is still open, and then decide when to lock rather than whether to look.
What decides it on your file
Three things settle this, and none of them can be answered from a general article:
- Your exact terms. Index, margin, caps and floor, from the notice. Two loans with the same starting rate can reset very differently.
- What a refinance actually prices at for you, at your credit, your equity and your loan size, and what it costs to close.
- How long you expect to keep the house. That horizon decides whether a refinance earns back its costs.
Send me the page of your notice with the index, margin and caps on it, and I will run the path to the fully indexed rate and price the refinance side, including the times the answer is to keep the ARM.
General information about adjustable-rate mortgages, not a quote or a statement of your loan terms. Your note and your adjustment notices govern the index, lookback, rounding, caps and floor that apply to your loan. The example uses a 30-day average SOFR near 3.75% in September 2026; payments shown are principal and interest only. Forest Hills Mortgage LLC, NMLS #1982611. Matt Mergo, NMLS #563819. Licensed in Florida, Pennsylvania and Texas. Equal Housing Opportunity.
Your notice arrived. Let’s run it.
Tell me the index, margin and caps on your loan and roughly how long you plan to stay. I will show you where the rate goes from here and what a refinance costs against it.