Adjustment Frequency

Adjustment Frequency

In adjustable-rate mortgages, the rate at which changes to a mortgage's interest rate occur. Usually, the interest rate changes once a year, but some mortgages change rates as often as once a month or as seldom as every five years. The higher the adjustment frequency, the higher the financial risk for the homeowner. For example, if the adjustment frequency is once a month, a homeowner could find his/her mortgage payment increasing every month for five months before it goes down again. This ties up more of the homeowner's income, and increases the likelihood of default.
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When costs vary with adjustment frequency, price changes may become smaller as inflation rises, as evidenced by Lach and Tsiddon |1992~.
The analysis of the relationship between inflation and adjustment frequency is in section IV.
If (7) is not met, then the effect of reducing the time between changes on the average adjustment costs falls as the adjustment frequency rises.
Variable price adjustment costs

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