What Happens When Your ARM Resets?

Your ARM's fixed period is ending. Your rate is about to change. Here's what that actually looks like and what you can do about it.

How reset works

When your ARM resets, the lender takes the current index rate (typically SOFR or CMT) plus your margin. That becomes your new rate.

Example: Your 5/1 ARM at 4.5% is resetting. Current SOFR is 5.0%, and your margin is 2.5%. Your new rate: 7.5%. But adjustment caps limit how much it can go up.

Adjustment caps protect you

Most ARMs have:

• Initial adjustment cap: Usually 2%. Your rate can't go up more than 2% at the first reset.
• Periodic adjustment cap: Usually 1-2% per adjustment after the first.
• Lifetime cap: Usually 5-6% above your starting rate.

Your 4.5% ARM with 2/2/5 caps: first reset maxes at 6.5%, next year maybe 8.5%, lifetime max 9.5%.

What to do before reset

Refinance. If rates are lower or similar to your current rate, refinancing into a fixed rate locks in certainty. This is the most common move.

Make extra payments. The higher your equity when the rate adjusts, the less interest you're paying on the new rate.

Prepare for higher payments. Calculate your new payment at the maximum possible rate. If you can handle that, you have nothing to worry about.

Ask about a modification. Some lenders will offer a rate modification to keep you from refinancing away. Doesn't hurt to ask.

What NOT to do

• Don't panic sell. A 2% adjustment on a $300k loan is about $350/month more. Not great, but not catastrophic.
• Don't ignore the notice. Your lender must send a reset notice 210-240 days before adjustment. Read it.
• Don't assume you can't change anything. You have options.

The takeaway: ARMs are predictable. You know exactly when they reset and the maximum new rate. The worst move is doing nothing. The best move is planning 6+ months ahead.