Your ARM Is Adjusting. Do the Math First.
The 5/1 and 7/1 ARMs written during the low-rate years are reaching their first reset. Some of those borrowers should refinance immediately. Others would lose money doing it. The difference is a calculation you can run before you call anyone.
At a Glance
- Your new rate is not a mystery. It is your index plus your margin, limited by your caps. All three numbers are written in your note.
- The cap usually protects the first adjustment. Many ARMs limit the initial change to 2 or 5 percentage points, which can leave you below the fully indexed rate for a while.
- You get a long warning. Federal rules require the servicer to send notice of the first adjustment well ahead of the new payment, generally 210 to 240 days before it is due.
- Refinancing is not automatically right. If your adjusted rate lands near today's fixed rates, replacing the loan can cost more than it saves, especially if you plan to move within a few years.
- Interest-only ARMs are the real risk. When the interest-only period ends, the payment jumps from the recast alone, before the rate is even considered.
Three numbers decide your new rate
Pull out your note or closing package. Everything below is written in it, and none of it is up to the servicer's discretion.
The index
A published market rate your loan tracks. Newer ARMs are tied to an average of SOFR. Older loans written against LIBOR were moved to a SOFR-based replacement index under federal law, with a fixed spread adjustment applied so the transition itself did not change your economics.
The margin
A fixed number added to the index, set the day you closed and unchanged for the life of the loan. Commonly somewhere between 2.25 and 3 percentage points. Index plus margin is your fully indexed rate.
The caps
Written as three figures such as 2/2/5 or 5/2/5. The first limits the initial adjustment, the second limits each later adjustment, the third caps the total increase over the life of the loan. Your rate cannot exceed what the caps allow, even if index plus margin is higher.
One change most borrowers do not expect
The older 5/1 and 7/1 structures adjusted once a year. Most current ARMs, including the SOFR-indexed loans your older note may have converted to, adjust every six months after the fixed period ends. That means two possible movements a year instead of one. It is not necessarily worse, since the periodic cap applies to each change, but it does mean the payment you see at the first reset is not locked in for twelve months.
Your adjusted rate vs. a new fixed rate
An illustration of how the comparison usually looks. Your own figures come straight off your note.
Your rate after the first adjustment
A new 30-year fixed loan
The honest version: if your capped adjusted rate lands at or below what a new fixed loan would cost you, refinancing buys certainty rather than savings. That is sometimes worth paying for and sometimes not. If you expect to sell or move within a few years, the break-even math often says stay put.
Send us your note and your adjustment notice. We will calculate the capped rate, the fully indexed rate and the break-even on a new fixed loan, and tell you plainly if the answer is to do nothing.
Run My Numbers →If your ARM has an interest-only period, the rate is not your biggest problem.
Interest-only loans let you pay no principal for an opening period, commonly ten years. When that period ends, the loan recasts: the full remaining balance now has to amortize over the years that are left, not over a fresh thirty. The payment increase from that recast alone can be substantial, and it happens whether rates went up, down or nowhere.
If your note mentions an interest-only period, find the date it ends before you do anything else. That date, not the rate adjustment date, is the one that determines your payment shock, and the options are better when you address it several months ahead rather than after the first higher payment arrives.
You have more warning than you think
Federal disclosure rules give you months of lead time. Most people waste it because the notice arrives long before the payment changes and gets filed away.
The first adjustment notice
Your servicer must send it well ahead of the new payment, generally 210 to 240 days before it is due. That is roughly seven to eight months of notice.
Later adjustment notices
Every adjustment after the first comes with a shorter notice, generally 60 to 120 days before the new payment is due.
Where the decision belongs
Ninety to one hundred twenty days before the new payment. Enough time to compare, gather documents and close without rushing.
What closing takes
Most refinances close in 30 to 45 days once documentation is complete. Waiting until the higher payment arrives means carrying it for at least a month or two.
Four moves, and one of them is free
Do nothing
Genuinely the right answer for some borrowers. If the capped rate is tolerable, you are moving in a few years, or the break-even on refinancing runs longer than you plan to stay, staying on the ARM costs you nothing and keeps your options open.
Refinance to a fixed rate
Ends the uncertainty permanently. Makes the most sense when you are staying long term, when the fully indexed rate is well above current fixed pricing, or when a variable payment is simply not something you want to manage.
Refinance into another ARM
Often overlooked. A new ARM resets the fixed period, so a borrower planning to sell in five or seven years can take a lower rate than a thirty-year fixed and be gone before the next adjustment.
Pay it down or sell
A lump sum against principal lowers the payment at recast on some loan types. And if the house was always a medium-term plan, the reset is a reasonable moment to run the sale math rather than refinance into another decade.
Self-employed and worried you cannot requalify? Conventional underwriting reads your tax returns. Bank statement programs read your deposits instead. See bank statement programs.
All refinance optionsSix things in your loan documents
Your note and the adjustment notice contain everything needed to answer this. Send them over and we will read them with you.
- The index name, and whether your loan was moved from LIBOR to a replacement index.
- Your margin, the fixed number added to the index. This never changes.
- Your caps, written as three numbers, covering the first adjustment, each later one, and the lifetime maximum.
- The adjustment frequency, annual on older notes, commonly every six months on current ones.
- The first adjustment date, and any interest-only period end date, which is often the more important of the two.
- Any rate floor, which sets a minimum even if the index falls.
Why this is landing here now
ARMs were a competitive tool here
During the tightest years of the corridor market, buyers used ARMs to stretch into a winning offer when inventory in Nashua, Merrimack and Hudson was brutal. Those loans are reaching their first reset roughly now.
Higher balances raise the stakes
Massachusetts commuters buying on this side of the border often carry high-balance or jumbo loans. A single percentage point on a large balance is a very different conversation than it is on a small one.
Escrow can move at the same time
New Hampshire funds itself on property tax, so a reassessment can raise your escrow in the same year your rate adjusts. When the payment jumps, it is worth confirming which of the two actually caused it before assuming the loan is the problem.
Local office at 20 Trafalgar Square, Suite 304, Nashua NH. Serving Nashua, Hudson, Merrimack, Litchfield, Amherst, Milford, Hollis, Brookline, Pelham and Londonderry.
More on our local team: Nashua mortgage broker.
Six ways people get this wrong
Panicking at the word adjustment
An adjustment is not automatically an increase, and the initial cap frequently limits it to less than the fully indexed rate would suggest. Calculate before you assume.
Refinancing without a break-even
Closing costs divided by the monthly saving gives you the number of months to recover them. If you will not be in the house that long, the refinance loses money no matter how much better the rate looks.
Ignoring the notice for six months
The first adjustment notice arrives seven to eight months early precisely so you can act. Filing it away and reacting after the payment changes removes every good option except the fastest one.
Assuming a fixed rate is always safer
It is safer against rate movement and worse against everything else, including the cost of restarting amortization. For a borrower leaving in four years, another ARM is often the cheaper and equally sensible choice.
Missing the interest-only recast
People focus on the rate reset date and overlook the interest-only end date, which frequently produces the larger payment increase and arrives on its own schedule.
Only asking your current servicer
Your servicer can tell you what your loan does. They are not obliged to tell you whether a different loan would serve you better, and they will not compare their offer against the rest of the market.
ARM reset questions, answered
My ARM is adjusting. What should I do first?
Find three numbers in your note: the index, the margin and the caps. Index plus margin gives your fully indexed rate, and the initial cap limits how much the rate can actually move at the first adjustment. Compare that capped rate against what a new fixed loan would cost you, including closing costs. Only then does refinancing become a decision rather than a reflex.
How is my new ARM rate calculated?
The servicer takes the current value of your index on a set date, adds your margin, and applies your caps. The margin was fixed the day you closed and never changes. The result is rounded according to the terms in your note. Nothing about the calculation is discretionary, which means you can estimate it yourself before the notice arrives.
What do numbers like 2/2/5 or 5/2/5 mean?
They are your rate caps. The first figure limits how much the rate can change at the very first adjustment, the second limits each adjustment after that, and the third caps the total increase above your original rate for the life of the loan. A loan with 2/2/5 caps and a 3% start rate can never exceed 8%, and cannot exceed 5% at the first adjustment.
My loan was based on LIBOR. What happened to it?
LIBOR was retired and legacy contracts were moved to SOFR-based replacement indices under federal law, with a fixed spread adjustment applied so the switch itself was not meant to change the economics of the loan. Your margin and caps were unaffected. If you want to verify how your specific loan transitioned, the servicer is required to have notified you and can confirm the replacement index in writing.
How much notice does my servicer have to give me?
For the first adjustment on most ARMs, notice is generally required 210 to 240 days before the new payment is due, which is roughly seven to eight months. Every adjustment after that carries a shorter notice period, generally 60 to 120 days before the new payment is due. The early notice exists so you have time to act, and it is the most commonly wasted advantage in this whole process.
Should I refinance into a fixed rate?
It depends on two things: how your capped adjusted rate compares to current fixed pricing, and how long you plan to keep the house. Divide the closing costs by the monthly saving to get your break-even in months. If you will likely move before that point, refinancing costs you money even at a better rate. If you are staying long term and the adjusted rate is meaningfully higher, fixing it usually wins.
How often will my rate adjust from now on?
Older 5/1 and 7/1 structures adjusted annually. Most current ARMs adjust every six months once the fixed period ends, so the rate can move twice a year. Each of those movements is limited by your periodic cap and the lifetime cap still applies, so there is a ceiling regardless of how often it changes.
Can I refinance out of an ARM if I am self-employed?
Yes, though the documentation path may need to change. If write-offs have reduced the income shown on your tax returns, conventional underwriting can produce a decline even when the payment is comfortably affordable. Bank statement programs qualify you on 12 or 24 months of deposits instead of returns, which is frequently the route that works for contractors, salon owners, agents and freelancers.
My payment went up but my rate did not change. Why?
That is almost always escrow rather than the loan. Property tax reassessments and insurance increases both flow through the escrow account and can move a monthly payment by a few hundred dollars with the interest rate untouched. Refinancing does not fix an escrow increase. Ask your servicer for the escrow analysis before assuming the loan is the cause.
Send the note. We will read it with you.
Your loan documents contain the answer already. In one call you will know your capped rate, your fully indexed rate, your break-even on a new fixed loan, and whether the right move is to do nothing at all.
NextGen Mortgage Loans, NMLS #1621958. NH Broker License #1621958MBRR, MA Broker License #MB1621958, ME Broker License #1621958, FL Broker License #MBR4542, RI Broker License #20265029LB. Licensed in NH, MA, ME, FL and RI. This page is general information only and is not a commitment to lend, an offer of credit, or a rate quote. Index values, margins, caps, adjustment frequency, rate floors and interest-only terms are governed by your individual note, which controls in all cases. Disclosure timing requirements described here are general and may differ for certain loan types. Program guidelines vary by lender and are subject to change without notice. All loans are subject to underwriting approval, income and asset verification, and property appraisal. Equal Housing Opportunity.
MLO License Info: NMLS #1621958, NH Broker license #1621958MBRR, and MA Broker license #MB1621958, ME Broker License #1621958, FL Broker License #MBR4542, RI Broker License #20265029LB
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