ARM Mortgage Calculator

An adjustable rate mortgage (ARM) has an initial fixed interest rate that then changes according to a predetermined schedule over the life of the loan. This calculator takes into account how different ARM models work. It allows you to select how many years the fixed rate will last and at what intervals it will adjust thereafter. For example, annual adjustment models such as 5/1, 7/1, or 10/1; semi-annual adjustment relatively new SOFR loans such as 5/6, 7/6, or 10/6; and less frequent adjustment models like 5/5 can be considered. By entering the loan terms and the adjustment conditions, it will project the entire life of the loan.

ARM mortgage naming

This model is represented by two numbers. The first number indicates the length of time that the interest rate will remain fixed; so a 7/1 has a seven year fixed term. The second number indicates how often the interest rate will change after that. For older ARMs, a 1 meant an annual adjustment. For loans where the interest rate is currently based on the SOFR index, the second number is given in months; thus a 7/6 means semi-annual adjustments.

Most ARM loans have a 30-year term. The initial interest rate is usually slightly lower than that of a comparable 30-year fixed-rate loan. In exchange for the long-term security of a fixed rate, there are reduced upfront costs, which makes this model advantageous if the property is sold or refinanced before the end of the fixed period, or an income increase is expected.

How interest rate works after fixed term ends

At the end of the fixed rate period, the interest rate is reset based on two factors. The index is a publicly available reference value that changes depending on market conditions (e.g., SOFR). The spread is a fixed amount added to the index by the financial institution and remains unchanged throughout the loan's term. The sum of these two values results in the fully variable interest rate, which is the actual interest rate applied to your loan.

Interest rate caps limit the range of adjustments and prevent interest rates from increasing too much. They are usually expressed as three numbers, such as 2/2/5. The first number is the maximum increase in the interest rate at the first reset. The second number is the maximum increase at each subsequent adjustment. The third number is a lifetime cap that limits how high the interest rate can go from its starting point. With a 2/2/5 system, if an adjustable-rate mortgage starts with an interest rate of 6.5%, it will never be more than 11.5%.

Here's how to use this calculator.

First enter the loan amount, initial interest rate, term and fixed period. Then select how often to adjust the interest rate. You will then get the initial monthly payment, which is what you pay each month during the fixed rate period. Next set the adjustment method. The index and spread determine the fully-indexed interest rate while the three caps limit the speed and size of any changes in the interest rate.

The results show the three most important amounts for your repayments. The initial monthly rate is what you will pay each month during the fixed period of time. The adjusted monthly rate is what you'll pay after the first reset to the fully-indexed interest rate. The maximum expected monthly amount shows the worst-case scenario: this is how much you would pay if the interest rate increased at the fastest allowed pace and reached its cap over the life of your loan. By enabling comparison with a fixed rate, you can see what the differences are from a typical fixed-rate loan for the same term.

The basis for calculating repayments:

For each installment a standard formula for the amortization with constant interest and amortization shares is used, where the remaining amount will be divided into several monthly installments.

M is the monthly payment amount and interest, P is the remaining balance before repayment, i is the effective monthly rate (annual rate divided by 12), and n is the number of payments remaining. With an ARM this formula isn't used just once. At each adjustment the calculation tool will pull the remaining loan balance, apply a new interest rate, and spread it out over the remaining months. The monthly payment amount changes not only because of interest rate changes but also because of that recalculation.

We take a loan of $300,000, using a 5/1 ARM (Adjustable-Rate Mortgage) with an initial interest rate of 6.5 percent, a SOFR index of 4 percent, a spread of 2.75 percent and a cap of 2/2/5. The first monthly payment is approximately $1,896 and lasts for five years. If the interest rate adjusts to a variable rate of 6.75 percent, the monthly payment will increase slightly. In the worst case scenario, the interest rate could rise to the cap of 11.5 percent, which would result in a monthly payment well over $2,600.

Typical functions of an arm

This table shows how a loan with the same 30 year term would be called depending on the fixed rate and adjustment frequency. All of these mechanisms are just settings that can be changed in this calculator.

ARM vs. Fixed Rate Mortgage Comparison

With a fixed-rate mortgage, the interest rate and monthly payment remain constant throughout the 30-year loan term. You always have a clear picture of your monthly costs and can refinance if rates drop. In exchange, the initial interest rate is usually higher. An ARM works in reverse: During the fixed-rate period, monthly payments are low and stable, but then they vary depending on market conditions. If the difference between the fixed and variable rates is large, you could save a lot of money initially with an ARM. If the difference is small, the security of a fixed-rate mortgage is usually worth more than that small savings.

How often the interest rate is adjusted is also important. A loan with a semi-annual adjustment will change more quickly and frequently than one that adjusts annually, even though both are capped by the same ceiling. With less frequent adjustments, such as 5/5, monthly payments tend to remain stable for longer periods of time, while fluctuations can be larger at each adjustment.

Who is an ARM suitable for and what are the risks to be aware of?

An ARM is suitable for those who do not intend to keep the loan throughout its term. If you plan to move or refinance within the fixed rate period, you can take advantage of lower interest rates and avoid a rate adjustment. It's also suitable for buyers who expect their income to increase in the future. In this case, they may be able to more easily afford higher monthly payments.

The risk is that the monthly payments can jump dramatically. If interest rates go up after your fixed-rate period ends, you could see a jump in your monthly payment of several hundred dollars. There are also ARMs where the rate doesn't decrease even if market rates fall. Calculate what your maximum expected monthly payment will be before you lock into a loan and make sure that you can comfortably afford it when the interest rate adjusts.

This calculator is for educational and planning purposes only and does not constitute financial advice. Property taxes, insurance, PMI (Private Mortgage Insurance), HOA (Homeowners Association) fees or closing costs are not factored in. Actual rates, caps, indices and monthly payments may vary by lender and loan documents. Consult a qualified professional before committing to a mortgage loan.