ARM Mortgage Calculator

The ARM Mortgage Calculator models an adjustable-rate mortgage — such as a 5/1 or 7/1 ARM — both before and after the interest rate adjusts. It shows your low initial (teaser) payment, your worst-case maximum payment once the rate climbs to the lifetime cap, and the payment shock between them. A worst-case rate-and-payment trajectory chart, a year-by-year schedule, and an optional fixed-rate comparison help you decide whether an ARM is right for you.

What is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage has an interest rate that is fixed for an introductory period and then changes periodically for the rest of the loan. ARMs are written as two numbers, like 5/1 or 7/1: the first number is the length of the fixed period in years, and the second number is how often the rate adjusts afterward, in years. A 5/1 ARM is fixed for 5 years, then adjusts once every year; a 7/1 ARM is fixed for 7 years, then adjusts annually.

How ARM Rate Caps Work

After the fixed period, an ARM rate is recalculated as an index (a benchmark rate) plus a fixed margin set by the lender. Rate caps limit how far that rate can move, and they are the single most important protection for the borrower. They are written as three numbers, such as 2/2/5:

• Initial adjustment cap (first number) — the maximum the rate can rise at the first adjustment.
• Periodic adjustment cap (second number) — the maximum change at each later adjustment.
• Lifetime cap (third number) — the maximum the rate can ever rise above the initial rate over the life of the loan.

This calculator uses the caps to build the worst case: the rate jumps by the full initial cap at the first adjustment, then by the full periodic cap every year, until it reaches the lifetime ceiling and stays there.

ARM Payment Formula

Each time the rate changes, the remaining balance is re-amortized over the remaining term using the standard mortgage payment formula:

where M is the monthly payment, P is the remaining loan balance, i is the monthly interest rate (the annual rate divided by 12), and n is the number of remaining monthly payments. The maximum possible payment occurs once the rate reaches the lifetime ceiling, which equals your initial rate plus the lifetime cap.

Worst-Case Rate Example (5/1 ARM, 2/2/5 Caps)

Starting from a 6% initial rate, a 5/1 ARM with 2/2/5 caps follows this worst-case path:

ARM vs Fixed-Rate Mortgage

An ARM almost always offers a lower initial rate than a comparable fixed-rate mortgage, which means a lower payment during the fixed period. That is attractive if you expect to sell or refinance before the fixed period ends, or if you believe rates will fall. The trade-off is uncertainty: after the fixed period your payment can rise sharply. A fixed-rate mortgage keeps the same rate and payment for the entire term, trading a higher starting rate for complete predictability. Enter a comparable fixed rate in this calculator to see both side by side.

When Does an ARM Make Sense?

How to Use This Calculator

1. Enter your loan: Type the loan amount and the initial (teaser) interest rate, then pick the loan term and ARM type such as 5/1 or 7/1.
2. Enter the rate caps: Set the initial, periodic, and lifetime caps. The common default is 2/2/5.
3. Add a comparison (optional): Enter a comparable fixed rate to compare the ARM against a fixed-rate mortgage.
4. Click Calculate: Review your initial payment, worst-case maximum payment, payment shock, the trajectory chart, and the year-by-year schedule.

Frequently Asked Questions

What is a 5/1 ARM?

A 5/1 ARM is an adjustable-rate mortgage with a fixed interest rate for the first 5 years, after which the rate adjusts once per year for the remaining term. The first number is the length of the fixed period in years and the second number is how often the rate adjusts afterward, in years.

What do the ARM caps 2/2/5 mean?

ARM caps limit how much the rate can change. In a 2/2/5 structure the first number is the initial adjustment cap (the rate can rise up to 2% at the first adjustment), the second is the periodic cap (up to 2% at each later adjustment), and the third is the lifetime cap (the rate can never rise more than 5% above the initial rate).

What is payment shock on an ARM?

Payment shock is the increase from your initial monthly payment to a higher payment after the rate adjusts. This calculator shows the worst-case payment shock, which is the difference between your initial payment and the maximum payment that the lifetime cap allows.

How high can my ARM payment go?

The maximum is set by the lifetime cap. The highest possible rate is your initial rate plus the lifetime cap. At that rate the remaining loan balance is re-amortized over the remaining term, producing the maximum monthly payment. This tool calculates that worst-case payment for you.

Is an ARM better than a fixed-rate mortgage?

An ARM usually offers a lower initial rate, which can save money during the fixed period, especially if you plan to sell or refinance before it ends. A fixed-rate mortgage offers a predictable payment for the whole term. The right choice depends on how long you will keep the loan and your tolerance for the risk of higher payments later.

What happens to an ARM after the fixed period?

After the fixed period the rate is recalculated periodically as an index plus a margin, then limited by the caps. Each time the rate changes, the remaining balance is re-amortized over the remaining term, so the monthly payment can rise or fall. This calculator models the worst case in which the rate rises to the cap at every adjustment.

Additional Resources

• Adjustable-rate Mortgage - Wikipedia
• Adjustable-rate Mortgages - Consumer Financial Protection Bureau