ARM: what happens when your rate resets?

How an ARM works, in plain words

1. 5/6, 7/1… The first number is how many years the rate is locked. The second is how often it changes after that: /1 = every year, /6 = every 6 months.
2. New rate = index + margin. The index moves with the market (SOFR, Treasury). The margin is fixed for life, written in your Note. Think of it as the bank's markup.
3. Caps are the seatbelt. 2/1/5 means: the first change can move at most 2%, each later change at most 1%, and never more than 5% above the start rate.
4. Caps work both ways. If the market drops, the rate can drop too, but usually not below the margin.

Took an ARM in 2019–2022? Here's where you stand

A lot of people locked 2.5–3.5% for 5 or 7 years. Those locks are ending now, in 2025–2029. Index + margin today is around —. So most will hit the cap on the first change, not the full rate.

Had a LIBOR ARM? LIBOR ended June 30, 2023. By federal law, your loan switched to a SOFR rate plus a fixed add-on (0.71513% for 12-month LIBOR, 0.42826% for 6-month). Your margin and caps stayed the same. Check the letter your servicer sent in 2023.

Your servicer must warn you. For the first change: a notice 210–240 days before the first new payment. For later changes: 60–120 days before. No letter yet? You still have time to plan.

4 ways to handle a reset

• Refinance into a fixed rate. Worth it when the reset rate is higher than today's fixed rate. Run T31.
• Pay it down before the change. Each extra dollar lowers the new payment. Some lenders also do a recast. See T33.
• Keep it. If the worst case still fits your budget, the ARM may stay cheaper than a 7% fixed for a while.
• Sell if you were moving anyway. See what you walk away with: T21.

Next steps

1. Pull your Adjustable Rate Note. Write down the index, margin and the 3 caps. Put them in the box above.
2. Call your servicer: "What is my next change date and the projected rate?"
3. Worst case doesn't fit? Get a refinance quote 3–4 months before the change, not the week of.