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What is a Mortgage Reset?

Tricia Christensen
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Updated: May 16, 2024
Views: 23,227
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A mortgage reset is sometimes part of a balloon mortgage and it has several features. Generally when people first obtain their mortgage, they might have the option to pay much lower interest rates or make interest only payments for the first few years of owning the home. However, at a specific point, either the entire amount of the mortgage becomes due or the mortgage is readjusted and reset with a higher interest rate. This can dramatically increase monthly payments, and the mortgage reset certainly contributed to higher foreclosure rates in the latter part of 2000 because of many lenders’ inability to make larger monthly payments.

One of the reasons the balloon mortgage became so popular was that some people were able to borrow more money and purchase more expensive houses initially. Ability to afford payments based on income was calculated on the basis of the payments prior to the mortgage reset. Many people could reasonably afford payments at pre-reset levels, but weren’t able to do so when the balloon payment or reset option had to be exercised.

Moreover, when people pay interest only loans, they are not building any equity in their home. Home values declined in the late 2000s, and lots of people quickly had upside down mortgages. They owed more than their homes were worth, and couldn’t sell them to completely pay off a mortgage. Refinancing became difficult too because amount people needed to borrow exceeded the value of their homes.

Another form of reset mortgage caused greater foreclosure rates. The option ARM (adjustable rate mortgage) could allow some borrowers to avoid paying full interest payments for the introductory period of the loan. This meant borrowers actually added to the debt they owed each month and immediately put their mortgage in an upside down state.

Sometimes the mortgage reset operates gradually. The introductory rate is short, perhaps less than a year, and then interest rates are raised every half year or so, and usually far exceed the prime interest rate. This can ultimately mean people pay far more in payments and these payments can continue to increase on a regular basis.

The standard option for many people who hit the mortgage reset period is to seek refinancing to a lower interest rate, which helps to keep payments stable. However, this low rate may still be more than a borrower can afford, and banks have considerably tightened lending restrictions since the late 2000s. Obtaining refinancing unless credit rating and history are excellent, and unless a person can prove they will meet the payments, may be very difficult. Many people find the only option is foreclosure and they lose their homes.

Those thinking about a mortgage with any form of reset should consider their ability to afford payments once resets occur and whether they would be able to get refinancing for a mortgage that suddenly becomes due. These types of mortgages may be harder to find now too, because they have proven so problematic for the housing market and lending industry. Most people are better off obtaining mortgages that have stable and predictable payments and that manage to increase equity in the home with each payment.

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Tricia Christensen
By Tricia Christensen
With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia Christensen is based in Northern California and brings a wealth of knowledge and passion to her writing. Her wide-ranging interests include reading, writing, medicine, art, film, history, politics, ethics, and religion, all of which she incorporates into her informative articles. Tricia is currently working on her first novel.
Discussion Comments
By mutsy — On Nov 14, 2010

BrickBack- In order to find a mortgage it is best to go to Bankrate in

Here you can get an online mortgage quote and I know Lending Tree offers quotes from several other lenders.

They also offer calculators for your mortgage in order to see what you can afford. It is best to stay away from adjustable rate mortgages that offer a mortgage rate reset.

These mortgages are usually best for seasoned investors who have the money to hold on to the property if they are not able to sell it.

This is definitely not recommended for a first home mortgage. If you are looking for a mortgage for the first time, the government offers many incentives and banks and mortgage brokers should be able to offer you a variety of products to get you in your first home.

By BrickBack — On Nov 14, 2010

Sneakers41-Usually these new payments were anywhere from double to triple of what the original mortgage payment was.

The only way to obtain a mortgage in a form of revolving credit like that is for a home equity line of credit.

For example, if you choose to buy another property and have a paid off primary home, you could get a home equity line of credit on the primary home and buy the second home.

This line of credit could be taken out for anything and it works like a credit card in which you only make payments on the money you borrow and the line can be kept open for emergencies.

By sneakers41 — On Nov 14, 2010

Anon34377-There are adjustable rate mortgage resets available for a specific amount of time. For example, there are five year ARM mortgage loan rates that allow a low interest only mortgage payment for the first five years and then after the fifth year the loan resets to whatever the bank chooses.

This is what happened to a lot of people who chose this type of loan in order to quickly sell the home that they just bought for a quick profit.

What ended up happening was that the real estate market crashed and these homes were not able to sell and the buyer was stuck. When many of these mortgages rate reset took place, many homeowners could not afford the cost of the mortgage payment.

By anon34377 — On Jun 21, 2009

Is there such thing as a mortgage that is set up like a credit card debt, where you pay enough each month to cover interest due and a little extra for principal reduction, then the interest due the following month is recalculated on the slightly smaller principal amount? It would not balloon, you would just keep making payments every month, with the interest portion decreasing each month as you paid down on the principal until the loan is paid off.

Tricia Christensen
Tricia Christensen
With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia...
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