ARM payment shock: what your mortgage payment becomes at reset
An adjustable-rate mortgage doesn't recalculate your payment by just swapping in a new interest rate. At the reset date, the lender takes whatever balance is still outstanding and spreads it — re-amortizes it — over however many months are left on the loan, at the new rate. That re-spreading is why the payment can jump by more than the rate change alone would suggest.
The method
It's the same fixed-payment formula behind any amortizing loan: M = P × r / (1 − (1 + r)^−n), where P is the outstanding balance, r is the monthly rate (annual rate ÷ 12 ÷ 100), and n is the number of months left. To find the shock, compute M twice with the exact same P and n — once at the current rate, once at the new one — and the difference is the payment increase.
A real example
Take a $280,000 balance with 240 months (20 years) left, currently at 3.5%, resetting to 6.5%.
- Monthly rate now:
3.5 ÷ 12 ≈ 0.2917%, or 0.0029167 as a decimal. n = 240 payments. - Payment now:
280,000 × 0.0029167 / (1 − 1.0029167^−240) ≈ $1,623.89. - Monthly rate after reset:
6.5 ÷ 12 ≈ 0.5417%, or 0.0054167 as a decimal, same n = 240. - Payment after reset:
280,000 × 0.0054167 / (1 − 1.0054167^−240) ≈ $2,087.60.
The increase is $463.72 a month — about 28.6%. That's a cent more than you get subtracting the two rounded payments above ($2,087.60 − $1,623.89 = $463.71); the true increase is computed from the exact, unrounded payments and only then rounded to the cent, so it can land a penny either side of subtracting two already-rounded dollar figures. Neither number is wrong — they're just rounding at different points in the calculation.
A second example: a 5/1 ARM resetting further out
Take a $320,000 balance with 300 months (25 years) left, currently at 4.0%, resetting to 7.0%.
- Payment now:
r = 4.0 ÷ 12 ≈ 0.0033333;320,000 × 0.0033333 / (1 − 1.0033333^−300) ≈ $1,689.08. - Payment after reset:
r = 7.0 ÷ 12 ≈ 0.0058333;320,000 × 0.0058333 / (1 − 1.0058333^−300) ≈ $2,261.69.
That's a jump of $572.62 a month, roughly 33.9% — a bigger percentage increase than the first example even though the rate moved by the same 3 percentage points, because a longer remaining term (300 months instead of 240) means more of the payment is interest-sensitive to begin with.
Why re-amortizing (not just swapping the rate) matters
If a lender simply charged the new rate on last month's payment amount, the balance would barely be affected. Re-amortizing forces the entire remaining balance to fully pay off within the remaining months at the new rate, which is a fundamentally different, usually much larger, number — and it's what real ARMs actually do at a reset.
What this doesn't include
This is principal-and-interest arithmetic only. It leaves out property taxes, homeowner's insurance, PMI or MIP, HOA dues and escrow, so the real bill after reset will be higher than the P&I figures above. It also doesn't know your loan's rate caps, margin, index or floor — those can limit how far a real reset is allowed to move in one jump, which this simple before/after comparison does not model.
Run your own numbers
The free ARM Payment Shock calculator runs this instantly for your own balance, rate, term and reset rate, entirely on your device.