What Is a Reset Date?

Malcolm Tatum

In the world of mortgage financing, a reset date is a term used to refer to the actual date that the fixed mortgage rate applied for the first term of an adjustable rate mortgage is no longer in force, and is superseded by a new adjustable interest rate. This length of this initial term is documented in the provisions of the mortgage contract, with the reset date occurring anywhere from a year to a decade after the mortgage is approved. At that point, the debtor is assessed interest based on the average mortgage rate that applies in the country where the property is located, with that rate fluctuating based on the movement of those average rates.

Man climbing a rope
Man climbing a rope

The arrival of a reset date is important for both the lender and the debtor, since the management of the mortgage will now change. Up to that point, the lender has assessed interest on the outstanding balance of the loan based on an agreed-upon fixed rate designed to be in force from the signing of the contract to the reset date. From that point on, the rate is subject to periodic adjustment based on what is happening with mortgage rates in the local economy. In some cases, that rate may adjust as frequently as month-to-month.

The purpose of including a reset date in the adjustable rate mortgage (ARM) is to provide the lender with the ability to continue generating interest income for as long as the mortgage is in force. At the same time, the ability to at some point switch from a fixed rate to an adjustable rate means that the lender is not locked into a situation in which the rate is so low in comparison to the latest average rates that the returns are undesirable. Depending on the status of the national averages at the time the reset takes place, the lender may be in a position to generate more income from the mortgage.

Depending on what is happening in the mortgage market, the debtor may also benefit from the arrival of the reset date. Most ARMs do include limits on just how low the applied interest rate can be, with that figure being lower than the fixed rate applied over the first year or years of the contract but still enough to protect the lender from losing money on the deal. Assuming that mortgage rates are low at the time the reset date is reached, the debtor may find that for at least a time, his or her mortgage payments are a little lower than before. There is the risk that interest rates will be significantly higher at the time the reset date is reached, which would mean the monthly installment payments would increase. For this reason, potential home buyers should weigh the relative merits of a fixed rate mortgage and an ARM with a reset date, project the most likely outcome over the duration of the mortgage, then choose accordingly.

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