Interest rate adjustment period

"What is an interest rate adjustment period?"

There are two adjustment periods to know about when considering refinancing into or out of an ARM Adjustable Rate Mortgage: The Initial Adjustment Period and the Note Adjustment Period. You may see them by many other names, however the Initial Adjustment Period refers to the fixed period of your ARM loan, and the Note Adjustment Period refers to the frequency with which the mortgage payments will go up or down after the Initial Adjustment Period. The terms are outlined in your Adustable Rate Mortgage note, and are generally quoted as such: Initial Period Length/Note Adjustment Period numerically, but not always consistently. So if your loan is quoted as a 3/6 LIBOR it will have a 3 year Initial Adjustment Period and a 6 month Note Adjustment Period thereafter. Depending on your ARM's rate caps and adjustment caps, payments can significantly increase at an adjustment period, causing most borrowers to refinance and convert to fixed rate mortgages prior to the end of their initial adjustment period.

The Base rate is the interest rate on which the lifetime cap is calculated. If you have a lifetime cap of 5 percent, that means that your interest rate over the life of the loan cannot be greater than 5 points above the base rate. In the above example, the base rate is 9 percent, and the lifetime cap is 5 percent. That means that your interest rate over the life of the loan cannot exceed 14 percent.

Many adjustable rate mortgages offer fixed rates for a portion of the life of the loan. For example, you may have a 30 year mortgage where the interest rate is fixed for the first 2 years and then adjusts every month after the fixed period ends.