Adjustable Rate Mortgage Calculator
Use our Adjustable Rate Mortgage Calculator to determine your initial mortgage payment, potential future payments and worst case scenario for an adjustable rate mortgage (ARM). Your mortgage rate and monthly payment can change and potentially increase significantly with an adjustable rate mortgage and you can use this calculator to understand what your rate and payment may be in the future. We encourage you to use this calculator to evaluate multiple scenarios to understand if an ARM is the right mortgage option for you.
How Our Adjustable Rate Mortgage Calculator Works
Adjustable Rate Mortgages have an initial fixed rate period when your interest rate and monthly payment remain constant. Following the fixed rate period, your mortgage rate and payment are subject to change on an annual or semi-annual basis, depending on the adjustment period for your loan. ARMs are relatively complicated and our Adjustable Rate Mortgage Calculator factors in all important loan terms to enable you to evaluate multiple scenarios. Our calculator uses the following inputs:
Mortgage Term.This is the length of your mortgage. Most ARMs have 30 year terms.
Fixed Rate Period. This is the initial period of the loan when your interest rate and monthly payment are fixed and do no change. The fixed rate period is usually three, five, seven or ten years.
Fixed Period Interest Rate. This is your mortgage rate during the fixed rate period of the loan. The lower your fixed period rate, the lower your initial monthly payment.
Adjustment Period. This determines how frequently your loan adjusts during the adjustable rate phase of the mortgage. Most ARMs adjust annually or every six months.
ARM Index. This is an interest rate such as treasury note yield that is one of two factors that determines your fully-indexed rate, which is your interest rate during the adjustable rate period of the mortgage. The ARM index changes based on fluctuations in the economy and other factors.
ARM Margin. This margin is added to the ARM index to calculate the fully-indexed rate. The ARM margin is a set when your loan closes and does not change.
Initial Adjustment Cap. This is how much your mortgage rate can increase when it first adjusts after the fixed rate period expires. The initial adjustment cap is usually 2% or 5%.
Subsequent Adjustment Cap. This is how much your mortgage rate can change at any adjustment period following the initial adjustment.
Life Cap. This is the maximum amount your mortgage rate can increase over the course of an ARM. The fixed period interest rate plus the life cap equals the maximum mortgage rate you may pay with an adjustable rate mortgage.
Our calculator enables you to understand numerous scenarios for an ARM including the following:
Initial Monthly Payment. Understand your estimated monthly payment during the initial fixed rate period of the loan. This is the payment you make immediately after your loan closes for a set number of years, depending on your fixed period interest rate and length.
Current Fully-Indexed Rate Scenario. The calculator enables you to review the current fully-indexed rate and what your monthly payment is based on this rate. The fully-indexed rate changes over time but this output enables you to understand what your payment may be when the loan starts adjusting. You can also determine total interest expense for an ARM based on applying the fully-indexed rate for the entire adjustable rate period of the loan.
Worst Case Scenario. The final scenario the calculator shows you is the worst case scenario for an adjustable rate mortgage, when your interest rate and monthly payment increase as much as possible as quickly as possible. The calculator also determines the maximum interest rate at the first adjustment period and over the life of the mortgage. You can also understand the monthly payments based on these interest rates so you can understand the potential for payment shock with an ARM.
Although this scenario is relatively unlikely our Adjustable Rate Mortgage Calculator enables you understand all of the potential outcomes for an adjustable rate mortgage, both positive and negative.
What Borrowers Should Know About Adjustable Rate Mortgages (ARMs)
Adjustable Rate Mortgage Basics
With an adjustable rate mortgage (ARM) your interest rate and monthly payment are fixed for the first one, three, five, seven or ten years of the loan and then subject to change and potentially increase annually or semi-annually over the remainder of the loan term. ARMs are often referred to as 3/1, 5/1, 7/1 or 10/1 ARMs with the first number indicating the length of the initial fixed rate period and the second number indicating how frequently the interest rate can change during the adjustable rate period. For example, with a 7/1 ARM, the interest rate and monthly mortgage payment are fixed for the first seven years of the loan and then subject to change on an annual basis for the remaining 23 years of the mortgage. Most adjustable rate mortgages have 30 year loan terms.
The Interest Rate for an Adjustable Rate Mortgage
The interest rate for an adjustable rate mortgage during the initial fixed rate period is set by the lender based on market conditions and negotiations with the borrower. The interest rate during the adjustable rate period is called the fully-indexed rate and is determined by adding the ARM index to the ARM margin. The ARM margin is a set interest rate, usually between between 2.0% and 3.0%, that does not change over the course of your mortgage. The ARM index is an underlying interest rate, such as the 30 day average SOFR, one year LIBOR or the treasury rate, that fluctuates based on economic factors. Because you add the index to the margin to determine your mortgage rate, if the ARM index increases, your mortgage rate increases but if the index decreases, your rate goes down. The fully-indexed rate is used to calculate your monthly mortgage payment for an ARM so an increase in that rate increases your payment. ARMs use adjustment caps that limit the increase in interest rate at the first adjustment period, subsequent adjustment periods and over the life of the mortgage. The life cap for an adjustable rate mortgage is usually 5.0%, so if your initial interest rate is 2.750%, the maximum interest rate you could pay over the life of the loan is 7.750%. With our Adjustable Rate Mortgage Calculator, you can use different inputs for the ARM margin and index as well as the adjustment and life caps to evaluate numerous scenarios for an ARM.
Advantages of an Adjustable Rate Mortgage
Advantages of an ARM include a lower initial interest rate as compared to a fixed rate mortgage and lower initial monthly mortgage payment. The lower initial payment and interest rate also mean that borrowers can typically afford a larger mortgage with an ARM. Use our ARM Calculator to determine your lower initial payment with an ARM. Adjustable rate mortgages can also be a good option for borrowers in a high interest rate environment if you think mortgage rates will go down in the future. In that scenario you pay a lower interest rate initially and then you benefit further when your interest rate and payment decline if rates drop in the future. Predicting interest rates is highly challenging and exposes borrowers to significant risk.
Disadvantages of an Adjustable Rate Mortgage
Disadvantages of an adjustable rate mortgage include the possibility that your mortgage rate and monthly payment spike in the future. With some ARMs your interest rate can increase by 50% or more at any adjustment period which would cause your mortgage payment to increase significantly. In general, ARMs are better suited for borrowers with a higher tolerance for risk or who are going to own their home for a shorter period of time (less than the length of the fixed rate period of the loan). Borrowers who value peace of mind and certainty should avoid the potential risks associated with an ARM. By presenting the worst case scenario, our calculator quantifies the disadvantages of an ARM.
Payment Shock Can Hurt
No one likes to think about the worst possible outcome but borrowers should understand possible payment shock for an ARM. In many cases the interest rate for an ARM can increase up to 5% over the course of the loan. So if your initial interest rate is 3.5% and the life cap for your loan is 5.0%, then your maximum rate could be as high as 8.5%, which is more than double your starting rate. Although a lot of things have to go wrong, it is important to be aware of the potential for a significant and sudden increase in your interest rate and how your payment could spike with an adjustable rate mortgage. Understanding how an ARM works helps you prevent payment shock and better manage your finances.
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Sources
"For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?” CFPB. Consumer Financial Protection Bureau, November 15 2019. Web.