By Brad Roche, The Mortgage Planner

If you took a 5/1 or 7/1 ARM back in 2020 or 2021, your fixed-rate honeymoon is ending. Your loan is about to adjust to today's rates, and the payment shock is real. Here is what that looks like and what you can do about it.

The ARM reset wave is here. In 2020 and 2021, 30-year fixed rates sat near 3 percent, and ARMs priced even lower. Borrowers who took a 5/1 ARM in 2021 are hitting their first adjustment right about now. A 7/1 ARM from 2020 adjusts in 2027, which means the clock is ticking. Around Charlotte and Lake Norman, where 2021 was a record year for relocations and buyers stretching into new construction, plenty of those ARMs are resetting right now.

What the reset costs you. Take a $400,000 loan at a 3 percent start rate. Principal and interest ran about $1,686 a month. Most of these loans carry a 2 percent first-adjustment cap, so the rate can jump to 5 percent at the first reset, pushing the payment to about $2,147. That is an extra $461 a month, over $5,500 a year, for the same house. And the caps only slow the climb. If rates stay elevated, later adjustments keep marching toward the fully indexed rate.

Why ARMs adjust the way they do. Your new rate is your index plus your margin, subject to your caps. Most 2020-era ARMs have a 2 percent initial adjustment cap and a 5 percent lifetime cap. Even with caps slowing the climb, the direction is the same: up.

Your options before the adjustment hits.

1. Refinance into a fixed rate now. If you plan to stay, locking a fixed rate before the adjustment removes the uncertainty entirely.

2. Refinance into a new ARM. If you expect to move or refinance again in a few years, a new 5/1 or 7/1 ARM can buy time at a lower payment.

3. Recast or pay down principal. Reducing the balance before the reset shrinks the payment at any rate.

4. Do nothing, but do the math. If your caps keep the first adjustment manageable and you will sell soon, riding it out can make sense. Know your exact adjustment date and your caps before you decide.

The bottom line. An ARM reset is not a surprise if you plan for it. Pull your note, find your adjustment date, index, margin, and caps, then run the numbers. If you want a second set of eyes on yours, that is exactly what we do.