What Is the Meaning of a Mortgage Reset?

what is a mortgage reset

by Mary Gallagher

If you have an adjustable loan, it will reset periodically.

Timing

Mortgages can reset at whatever point is spelled out in your loan documents. Typically, an adjustable loan is locked in at some rate for an initial period of time. At the stated time, the loan rate automatically resets, or changes. It might reset every month, every three months, every six months or every year, depending on the terms of your loan. This reset pattern continues for the full length of the loan.

Calculations

Your initial interest rate is whatever the loan was advertised for. Typically an adjustable rate mortgage starts off at a rate less than that of a fixed-rate mortgage. Every time it resets, however, the new rate is determined by an index and a margin. The index is an economic benchmark used for mortgage calculation. Many mortgage indices are in common use: the prime lending rate; the various London Inter Bank Offered Rates (LIBOR), rates charged by London-area banks; or the cost of funds

index (COFI) accumulated from data of the members of the Federal Home Loan Bank of San Francisco. The margin is a fixed number that is added to the index to arrive at your loan rate. For example, if your loan index is the 6-month LIBOR, which might be 1 percent at some given point, and the margin is three, your loan rate would be 4 percent.

Limits

Benefits

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