Time’s Up on Some Adjustable-Rate Mortgages

As adjustable-rate mortgages reset, homeowners face higher payments and tough choices.

Published: 3/3/2026, 9:35:01 AM EST

Time’s Up on Some Adjustable-Rate Mortgages — A single-family home in Los Angeles. (Allison Dinner/Getty Images)

For those who took five-year adjustable-rate mortgages (ARMs) in 2021, the day of reckoning is about to take place. Others who have 10-year ARMs also will be scrambling as they both receive letters from their lenders that monthly payments are about to soar.

In the beginning, an ARM typically gives you a lower rate than a fixed mortgage. But this rate lasts for three, five, seven, or 10 years and then the rate adjusts. For those with a 5/1, they have a fixed rate for five years followed by a yearly rate adjustment. Each rate adjustment has the potential to increase the loan payment.

Familiarize Yourself With ARM Terms

When the initial fixed-rate period ends, an ARM rate will adjust at set intervals. This usually happens every six or 12 months.

According to Charles Schwab, the new rate is calculated using an adjustable, market-based interest rate, such as the secured overnight financing rate (SOFR), plus a fixed margin set at the time the loan was established. For example, a 3 percent SOFR plus a 2.5 percent margin results in an adjustable rate of 5.5 percent.

However, most ARMS have three interest-rate caps to protect you from exorbitant rate increases. The initial cap limits how much your payment can go up when your initial fixed-rate period ends.

A periodic cap limits the size of the rate increase at each adjustment. And a lifetime cap establishes a maximum interest rate for the life of the loan.

Still, despite these caps, there could be a life-changing increase in your mortgage payment.

Preparing for an ARM Reset

It’s important to start planning early when your ARM is about to reset. A significant change could affect your budget. Being prepared may help avoid financial strain or foreclosure.

Start by reviewing your loan terms. You should know when the reset will happen. Check if your lender is using SOFR or prime rate. Know the margins your lender adds as well as the rate caps.

Pay attention to market conditions. Your future ARM rate is influenced by the broader U.S. economy. What is the direction of the prime rate and other benchmark rates? Note any Federal Reserve announcements about rate hikes.

You’ll also want to be aware of market conditions in the housing and financial sectors. If you’re in over your head, you may need to sell your home. Will you be able to do that?

Keep in mind that if rates are climbing or higher than when the loan originated, your adjustable rate will likely increase at reset.

What Are Your Options When an ARM Resets?

Once you have all the information, you can evaluate your options. There are several options you can consider:

Stay the Course and Do Nothing

According to Mortgage News Daily, the 30-year fixed mortgage rate, as of Jan. 14, 2026, was 6.07 percent. Given the current mortgage-rate environment, an ARM that was secured a few years ago may still have attractive terms. It might be your best option. This is especially true if you have a good cap structure.

Refinance If You Are Financially Sound

If your finances are strong and you have sufficient equity, refinancing your loan might make sense. Depending on your goals, you could opt for another ARM. If you don’t plan to stay in your home long term, it might make sense. According to Zebra, the median tenure for homeownership is 13.2 years. Or, if you foresee staying put for a while, you could switch to a fixed-rate loan.

But remember, closing costs can add up when deciding to finance. This is especially true if you pay “points” (a percentage of the loan amount) to secure a lower interest rate. You should work with a financial advisor to compare the financial impact of refinancing versus the worst-case scenario under your current ARM.

Pay Down the Loan

Pay a lump-sum partial payment to the loan’s principal ahead of a rate reset. According to Charles Schwab, the bank will reamortize the loan based on the lower outstanding balance, meaning recalculate your payment schedule. This could help keep your monthly payment manageable even if your rate goes higher.

But if you have the liquid assets, you might want to consider whether you should pay it down. Generally, if you can earn more in investments than what you’re paying in interest, it might make sense to invest. Consult with a financial adviser and weigh your options.

Move to a New Home

Many borrowers use an ARM when they don’t expect to stay in the house for a long time. If you are planning to move, refinancing may not be worth it, according to Charles Schwab.

You also may want to downsize if you can, and sell the current home and buy or rent another one.

Know Your Options When Your ARM Resets

Plan before you receive the notice from the lender of an upcoming rate adjustment. Before deciding, run the numbers and see what makes sense for your financial situation.

Consult with a financial adviser if you anticipate a significant increase in your monthly payment.

The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. NTD does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. NTD holds no liability for the accuracy or timeliness of the information provided.

From The Epoch Times