Your Adjustable-Rate Mortgage Resets in 2027. Work Out Your New Payment Before You Refinance.

Say you bought a home in mid-2020 with a $500,000 mortgage. That was under the $510,400 limit that year for a loan Fannie Mae or Freddie Mac could buy in most areas. You chose an adjustable-rate mortgage, or ARM. Its rate was fixed at 2.75% for 7 years, then changes once a year. That type is called a 7/1 ARM. Your loan payment has been $2,041 a month, not counting taxes and insurance.

In 2027, the 7 fixed years end. If market rates stay where they are today, your new rate is 6.75%. The payment jumps to about $2,980, which is $939 more every month. The rate could go as high as 7.75%, a payment of $3,243. This family is made up. The math is real.

You have three choices. You can refinance into a fixed rate, pay the balance down, or keep the loan. In this example, refinancing at a 7% rate saves money only if rates climb further. Paying $50,000 down first cuts the new payment by $357, with no fee.

How is my new rate worked out?

After the fixed years end, your rate changes on a schedule. Each change uses the same simple steps. A "point" here means one percentage point, such as going from 5% to 6%.

1. Start with the index. This is a public interest rate that moves with the market. Most newer ARMs use the 30-day Average SOFR, published by the New York Fed. SOFR is what it costs to borrow cash overnight with Treasury bonds as security.
2. Add the margin. This is a fixed number of points written in your loan contract. It never changes.
3. Round it. The standard loan contract used by Fannie Mae and Freddie Mac rounds to the nearest 0.125%, one-eighth of a point.
4. Apply the limits. Lenders call these caps. The new rate must stay inside them.

Your note is the loan contract you signed. The standard note uses the index from 45 days before each change. Your rate also has a floor, the lowest it can go. For newer Fannie Mae and Freddie Mac ARMs, the floor is the margin.

What do the three limit numbers mean?

The limits are written as three numbers, such as 5/2/5 or 5/1/5.

• First-change limit. The first number is how far the rate can move at the first change. With 5/2/5, that is up to 5 points.
• Later-change limit. The second number is how far it can move at each change after that. With 5/2/5, that is 2 points.
• Lifetime limit. The third number is the most the rate can ever rise above where it started. With a 2.75% start and a 5-point limit, it can never pass 7.75%.

The CFPB says first-change limits are commonly 2 to 5 points. Later-change limits are 1 to 2 points, and lifetime limits are often 5 points. Your loan may differ, so check your own papers.

What if my ARM started on LIBOR?

Many ARMs made in 2020 were tied to LIBOR, an older index. LIBOR stopped being published after June 30, 2023. Loans that used it were moved to an index based on SOFR.

A fixed add-on was attached to cover the usual gap between the two rates. Federal rules set it at 0.71513 point for loans tied to 12-month LIBOR. Your servicer, the company you send payments to, should have sent a letter naming your new index. Some 2020 ARMs used a Treasury index instead, so read that letter.

Where do I find my own numbers?

You do not need to guess. Three papers have them.

• Your Closing Disclosure. This is the five-page form you got at closing. Page 4 has a box called the Adjustable Interest Rate (AIR) Table. It lists your index, margin, lowest and highest rate, first change date and limits.
• Your note. Section 4 spells out the index, margin, rounding and limits in full.
• Your servicer's letter. By federal rule, it must arrive 210 to 240 days before your first new payment is due. It shows the new rate or an estimate.

What does the reset look like in our example?

Here is the example loan, step by step.

The 6.75% is inside the 5-point first-change limit, so it stands. The payment is reset so the loan still ends on its original date. That gives $2,980 a month.

We used today's index as an example. The real index on your change date will be different.

How many people face an ARM reset in 2027?

About 180,000 ARMs reach their first rate change in 2027. That estimate comes from ICE, a company that tracks mortgage data, in its October 2026 report. It includes roughly 74,000 ARMs with 7 fixed years taken out in 2020. ICE estimates their typical payment rises about $1,066 a month, or 36%.

ARMs are also popular again with new buyers. ICE reported they made up more than 11% of rates being locked for new loans, the most in nearly four years. Today's average 30-year fixed rate is 7.03%.

Should I refinance into a fixed rate?

Refinancing replaces your ARM with a new loan. It locks your rate for good, but you pay closing costs. Your Loan Estimate from the lender lists them.

In our example, a lender quotes 7.00% for 30 years, with $9,000 in costs. Both are examples. The new payment is $2,775.

That is less than the $2,980 ARM payment. The reason is that you stretch the loan by 7 more years. Total interest over the rest of the loan rises from about $405,000 to about $582,000.

So ask one question: when does the refinance start saving you money? Add the closing costs to the interest on the new loan. Compare that to the interest on the ARM, month by month.

• If rates stay the same, the ARM stays at 6.75%. The 7% refinance never catches up.
• If the ARM rises to its 7.75% limit, the refinance pays for itself in month 40, about 3.3 years in.

A shorter loan raises the payment but gives the same result. A 23-year fixed loan at 7% costs $3,045 a month. It pays for itself in month 35 in the worst case, and never if rates stay flat.

If the fixed rate is higher than your new ARM rate, you pay extra so your payment can never rise. That is worth it if a $3,243 payment would break your budget. A refinance also makes sense when a lender offers a fixed rate near or below your new ARM rate.

Should I pay the balance down before the reset?

Most ARM notes, including the standard one, reset the payment at each change. The new payment is set so the balance you owe that day is paid off by the original end date.

So any extra money you pay toward the balance before the reset lowers the new payment. You do not need to ask for a recast. A recast is when a lender lowers your payment after a lump sum, often for a fee.

In our example, paying $50,000 just before the reset:

• cuts the new payment from $2,980 to $2,623, or $357 a month,
• saves about $49,000 of interest if rates stay flat,
• keeps the worst-case payment at $2,854 instead of $3,243.

Keep enough cash for emergencies first. Money paid into a mortgage is hard to get back out.

What if I just keep the loan?

Keeping the ARM costs nothing up front. In our example, the rate starts at 6.75%. After that, it can change once a year, by up to 2 points each time.

If SOFR falls, your rate falls too, but never below your margin, 2.25% in our example. If SOFR rises, your payment rises, up to $3,243 at the 7.75% limit. Newer SOFR ARMs often change every 6 months, by up to 1 point.

Keeping the loan makes the most sense if you can afford the worst case. It also makes sense if you plan to sell within a few years.

Try it with your numbers

Enter your balance, rate, index, margin and limits. The example values match the family above. Open the rate limits section to add your refinance quote.