Adjustment Period

Sam · Posted: Fri Apr 09, 2004 3:44 am Post subject: Adjustment Period

Adjustment period is the time interval between two rate adjustments on an adjustable rate mortgage (ARM). The interest rate on an ARM varies at regular intervals depending on the variation in the index rate.

At each adjustment period, the interest rate and hence the payments on an ARM increases or decreases by a limited amount known as the payment cap. If the interval is a 3 year period, then the initial rate on the ARM remains fixed for 3 years after which it adjusts with respect to the index and the margin used.

The rate and payments on an adjustable rate mortgage change every year or in every 3 or 5 years. But there are some ARMs where the rate adjustments take place more frequently. Hence, in such cases, the adjustment period is also shorter, say a time span of 6 months. In most cases, the longer the adjustment period, the higher is the initial fixed interest rate or teaser rate on the ARM.

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