Adjustment Interval
Definition
The adjustment interval, in the context of an adjustable-rate mortgage (ARM), is the time period between each interest rate change. ARMs have variable interest rates that are periodically adjusted based on a corresponding financial index. The adjustment frequency can affect the overall cost of the mortgage and stability of monthly payments.
Examples
- One-Year Adjustment Interval: A common structure in which the interest rate is adjusted once every year. For example, if a borrower has a mortgage with an initial rate that is fixed for one year, the rate will be adjusted every 12 months thereafter.
- Six-Month Adjustment Interval: In this case, the interest rate is recalculated every six months. For instance, a borrower might start with a fixed rate for six months, after which the rate can change twice each year.
- Two-Year Adjustment Interval: Here, the interest rate changes every two years. If a borrower has an initial fixed rate for two years, the rate will be adjusted every 24 months following the initial period.
Frequently Asked Questions
What factors influence the adjustment interval set by lenders?
Lenders may consider various factors when setting the adjustment interval, such as market trends, borrower risk profiles, and expectations for future interest rates. The choice can be flexible depending on the lender’s policies and the preferences of the borrower.
How does the adjustment interval affect a borrower’s mortgage payments?
A shorter adjustment interval may lead to more frequent changes in mortgage payments, while a longer interval can provide more stability but may result in larger adjustments when they do occur. Borrowers need to balance the predictability of their payments with the potential savings from lower initial rates.
Can a borrower negotiate the adjustment interval?
While some lenders offer flexibility with the terms of the ARM, including the adjustment interval, not all mortgages allow for negotiation. It’s important for borrowers to discuss the options with their lenders to determine the best fit for their financial situation.
Related Terms with Definitions
- Adjustable-Rate Mortgage (ARM): A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. The initial interest rate is typically fixed for a period, after which it adjusts periodically based on a specific index.
- Interest Rate Cap: A limit on how much the interest rate can increase during each adjustment period of an ARM and over the life of the loan. Caps provide protection to the borrower against significant rate hikes.
- Initial Rate Period: The period during which the initial interest rate is fixed before it begins to adjust. For example, a 5/1 ARM has a fixed rate for the first five years, followed by annual adjustments.
Online Resources
- Consumer Financial Protection Bureau (CFPB): In-depth guides and tools on understanding different mortgage types including ARMs.
- Investopedia: Comprehensive articles and explanations on real estate and mortgage terms.
- Federal Housing Administration (FHA): Resources for homebuyers and borrowers about different loan programs and their terms.
References
- U.S. Department of Housing and Urban Development (HUD), Understanding ARMs, https://www.hud.gov
- Federal Reserve, The Mortgage Process: What You Need to Know, https://www.federalreserve.gov
Suggested Books for Further Studies
- “Home Buying Kit For Dummies” by Eric Tyson and Ray Brown
- Covers the basics of home buying, including financing options such as ARMs.
- “The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices, and Pitfalls” by Jack Guttentag
- An extensive resource on various mortgage products and terms, providing valuable insights for borrowers.
- “The Loan Guide: How to Get the Best Possible Mortgage” by Casey Fleming
- A practical guide focusing on strategies to secure favorable mortgage terms and understanding different loan products.
Real Estate Basics: Adjustment Interval Fundamentals Quiz
### How often does a one-year adjustment interval ARM adjust its interest rate?
- [x] Annually
- [ ] Semi-annually
- [ ] Every two years
- [ ] Monthly
> **Explanation:** A one-year adjustment interval ARM recalculates its interest rate annually, meaning once every 12 months.
### What is the adjustment interval in an ARM with a fixed rate period of five years followed by adjustments every year?
- [ ] Six months
- [ ] Monthly
- [x] Annually
- [ ] Two years
> **Explanation:** An ARM with a fixed rate period of five years followed by annual adjustments has a one-year adjustment interval after the initial five-year fixed period.
### Which adjustment interval might lead to the most stable monthly payments?
- [ ] Monthly
- [x] Annually
- [ ] Semi-annually
- [ ] Two years
> **Explanation:** Although longer intervals, like two years, could potentially provide more stability, annually is typically more common and provides a moderate level of stability while still adhering to frequent adjustments.
### How often does a six-month adjustment interval ARM adjust its interest rate?
- [ ] Every year
- [x] Twice a year
- [ ] Every three months
- [ ] Every two years
> **Explanation:** A six-month adjustment interval ARM recalculates its interest rate twice a year.
### What type of mortgage includes an adjustment interval?
- [ ] Fixed-Rate Mortgage
- [x] Adjustable-Rate Mortgage
- [ ] Balloon Mortgage
- [ ] Interest-Only Mortgage
> **Explanation:** Only Adjustable-Rate Mortgages (ARMs) have an adjustment interval as it is characteristic of their variable interest rates.
### What might you expect with a shorter adjustment interval, like six months?
- [x] More frequent changes in mortgage payments
- [ ] Lower initial interest rates
- [ ] Higher final payment
- [ ] More stable payments
> **Explanation:** A shorter adjustment interval results in more frequent changes in mortgage payments, which can fluctuate with market conditions.
### In the context of ARMs, what is the initial rate period?
- [ ] Time when the introductory interest rate is zero
- [ ] Time after the loan matures
- [x] Period when the initial interest rate is fixed
- [ ] The time loan payments increase
> **Explanation:** The initial rate period is the time when the interest rate on the ARM is fixed before it starts adjusting periodically.
### What is a common adjustment interval for many ARMs?
- [ ] Every two years
- [x] Annually
- [ ] Monthly
- [ ] Every five years
> **Explanation:** The most common adjustment interval for ARMs is annually, making it a standard frequency for interest rate recalculations.
### Why might a borrower choose an ARM with a longer adjustment interval?
- [x] For more stability in their monthly payments
- [ ] To have frequent interest rate changes
- [ ] To extend the loan term
- [ ] To decrease the interest rate
> **Explanation:** A longer adjustment interval can provide more stability in monthly payments over a more extended period which can be beneficial for budget planning.
### What protection can an interest rate cap provide to borrowers of ARMs?
- [ ] Protects from lowering house prices
- [ ] Guarantees property value
- [x] Limits the amount by which interest rates can increase
- [ ] Eliminates the need for mortgage payments
> **Explanation:** An interest rate cap limits the amount by which interest rates can increase during each adjustment period of an ARM and over the life of the loan, protecting the borrower from significant rate hikes.
