How to use the arm mortgage calculator
- Enter the loan amount, term and starting rate from your loan estimate, and choose the fixed period and how often the rate adjusts.
- Enter the margin and an assumed index rate for after the fixed period. Nobody knows future rates, so try a low, a middle and a high value.
- Enter the caps: how far the rate can move at the first adjustment, at later adjustments and over the life of the loan.
- Optionally enter a fixed rate to compare. Read the payment before and after the first adjustment, the worst case and the table of every rate change.
Formula
Payment = principal x r / (1 - (1 + r)^-n), with r the monthly rate and n the months left
New rate = index + margin, limited to the cap above or below the previous rate
Rate can never exceed starting rate + lifetime cap
After each reset the payment is recalculated on the remaining balance over the remaining months
Interest is calculated monthly on the balance and rounded to the cent. The worst case raises the rate by the largest amount the caps allow at every reset.
Worked example
A $400,000 30 year loan starts at 5.5% with a payment of $2,271.16. After 60 payments the balance is $369,842.16.
With an index of 4% and a margin of 2.75% the target is 6.75%, within the 2 point first cap, so the payment becomes $2,555.28 over the remaining 300 months. In the worst case the rate steps to 7.5%, 9.5% and then the 10.5% lifetime cap. A fixed loan at 6.5% would cost $2,528.27 a month.
How an adjustable rate loan works
An adjustable rate mortgage has a fixed rate for an initial period, such as 5 years, and then the rate changes at set intervals. The new rate is usually an index plus a margin, with caps that limit each change and the total change. The first number in a "5/1" style name is the fixed years, and the second describes how often the rate adjusts afterward.
Plan for the worst case
The risk of an ARM is the payment after the fixed period. Test whether you could afford the worst case payment, and not just today's. Compare it with a fixed loan in the mortgage calculator, see the total cost in the mortgage comparison calculator, and think about whether you plan to refinance or sell before the first adjustment.
What your loan documents decide
The index used, the margin, the cap structure, any floor on the rate and any payment cap are set by your loan and can differ from the example values here. Read the adjustable rate disclosure from your lender. For the full month by month balance on a fixed loan, use the amortization schedule calculator.
Assumptions and limits
- The margin, index, caps and starting rate are example values you must replace with your own terms.
- The index stays at the value you enter after the fixed period in the assumed scenario.
- Rate floors, payment caps, negative amortization, interest only periods and loan fees are not modeled.
- Taxes, insurance and mortgage insurance are not included in the payment.
Frequently asked questions
What does a 5/1 ARM mean?
The rate is fixed for the first 5 years and then adjusts once a year. In a 7/6 style loan, the rate would adjust every 6 months after 7 years.
What do the 2/2/5 caps mean?
The first adjustment can change the rate by up to 2 points, each later adjustment by up to 2 points, and the rate can never rise more than 5 points above the start. Your loan may use other caps.
Is an ARM cheaper than a fixed loan?
The starting rate is often lower, so the first payments cost less, but later payments can be higher. Compare the worst case with a fixed payment, and consider how long you expect to keep the loan.
What happens to my payment after the fixed period?
It is recalculated from the new rate, the remaining balance and the remaining months. If the rate rises, the payment rises with it, limited by the caps.