When an initial 5-year or 7-year ARM fixed period approaches its reset date, refinancing into a 30-year fixed mortgage eliminates the risk of steep interest rate spikes.
1. ARM Rate Reset Calculation Anatomy
- Secured Overnight Financing Rate (SOFR): The benchmark interest rate index used by modern adjustable mortgages.
- Lender Margin (e.g., 2.75%): The fixed percentage added to the benchmark rate upon reset to determine the new fully indexed note rate.
- Interest Rate Caps (2/2/5 Structure): Limits how much the interest rate can adjust during the first reset (2%), subsequent annual resets (2%), and lifetime cap (5%).