How does a Mortgagee determine the new monthly payment after an interest rate adjustment for an ARM?

The Mortgagee must determine a new monthly payment each time there is an interest rate adjustment. The Mortgagee must calculate the portion of the monthly payment attributable to Principal and Interest (P&I) by:

  • determining the amount necessary to fully amortize the unpaid principal balance for the remaining term of the Mortgage;
  • crediting all eligible prepayments; and
  • not debiting any delinquency. 

To calculate the monthly installment, the Mortgagee must use the scheduled principal balance that would be due on the Change Date, but reduced by the amount of any prepayments made to the principal.
All Adjustable Rate Mortgage (ARM) adjustments affect interest rates only; negative amortization is not permitted.

Additional questions may be directed to the HUD National Servicing Center at (877) 622-8525.
For policy information see Handbook 4000.1 III.A.3.a. at

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-04614