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Simple English definitions for legal terms
adjustment period
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A quick definition of adjustment period:
An adjustment period is the time when the interest rate on an adjustable-rate mortgage (ARM) can change. This happens at scheduled intervals, which can be every month, every six months, every year, or even longer. For example, a 5/6 ARM has a fixed interest rate for the first five years, and then the rate can change every six months. A 15/15 ARM has a fixed rate for the first 15 years, and then the rate can change once for the remaining 15 years.
A more thorough explanation:
Adjustment period refers to the time frame during which the interest rate on an adjustable-rate mortgage (ARM) can be reset. This period is set at regular intervals, such as monthly, semi-annually, annually, or every few years.
For instance, a 5/6 ARM has an initial interest rate that is locked for five years, after which the interest rate can be adjusted every six months. On the other hand, a 15/15 ARM allows for only one interest rate change during the entire life of the mortgage. After an initial rate for 15 years, the borrower assumes a second interest rate for the remaining 15 years.
Adjustment periods are important because they determine how often the interest rate on an ARM can change, which can affect the borrower's monthly mortgage payments. For example, if the interest rate increases during an adjustment period, the borrower's monthly payments may also increase.
Overall, adjustment periods are a crucial aspect of adjustable-rate mortgages, and borrowers should carefully consider the length of the adjustment period when choosing an ARM.
- A 3/1 ARM has an initial interest rate that is locked for three years, after which the interest rate can be adjusted every year.
- A 7/23 ARM has an initial interest rate that is locked for seven years, after which the interest rate remains fixed for the remaining 23 years of the mortgage.
These examples illustrate how adjustment periods work in different types of ARMs. In the first example, the interest rate can be adjusted every year after the initial three-year period, while in the second example, the interest rate remains fixed for 23 years after the initial seven-year period.