Adjustable rate mortgages (ARMs) offer a way for bargain-hungry borrowers to get the lowest mortgage rates and minimize their monthly payments. Unfortunately, they can also be unpredictable, because the rate you pay can change over time.

Predicting how much your monthly payments might change on an ARM can be difficult because the adjustments are cumulative and can pile up. At the same time, ARMs are capped so the rate can only increase so much and so fast over the life of the loan.

This Adjustable Rate Mortgage Calculator allows you to explore just how a varying rate might affect your mortgage payments over time. If you're thinking about getting an ARM, it lets you see just what the potential risks and benefits might be to help you make that decision.

About adjustable-rate mortgages

Though they're less common than they used to be, adjustable-rate mortgages have long been part of the mainstream of home lending. In many countries, they're actually the most common way to finance a home.

Adjustable-rate mortgages typically have lower initial rates than you can get on a comparable fixed-rate mortgage.  That's because lenders have to charge more on fixed-rate loans to offset the possibility that interest rates may go up over the next 15-30 years. Because ARMs roughly follow the market, they don't need that built-in hedge.

ARMs come in two main types. The most common is a "hybrid" ARM, that starts out with a fixed rate for a certain number of years, after which the rate periodically adjusts to reflect current market rates. If you're buying or refinancing a home, this is the type you'll likely have.

The other type is a "straight" ARM, where the rate begins adjusting almost as soon as you take out the loan, perhaps every month or every year. While these are sometimes used for high-value home purchases, they're more commonly used with home equity lines of credit (HELOCs).

With a hybrid ARM, the rate is usually fixed for a period of one to 10 years before it starts to adjust, with five and seven years being popular options.  They then begin to periodically readjust to a market-based rate, usually every year. These are often referred to as 5/1 or 7/1 ARMs, with the first number being the number of years the rate is fixed, and the second being how often the rate readjusts after the fixed period.

When an ARM starts to adjust, it doesn’t simply reset to whatever the current market rates are. There are limits, or caps, on how much an ARM can adjust at any one time, and on how much the rate can change over the life of the loan.

 

Who would use an ARM?

ARMs are popular with several types of borrowers. They include:

  • Buyers who expect to move within the next decade and wouldn't benefit from a 30-year fixed rate.
  • Borrowers who plan to pay the loan down quickly and wish to minimize interest payments
  • Borrowers who expect rates to change relatively little or even fall over the coming years
  • Buyers who pursue a strategy of periodic refinancing to get the lowest rates possible

 

Using the Adjustable Rate Mortgage Calculator

Under "Loan information," enter the following:

  • Loan amount : the size of the loan
  • Term in years:  This is the full duration of the loan, how long it will take to pay it off making the minimum payments. Do not enter the time before the first adjustment here.
  • Interest rate: Enter the starting rate for the loan
  • Report amortization: Choose how you want the amortization schedule to display.

Under "Adjustments," enter:

  • Months before first adjustment: How long the rate will stay fixed before it starts to adjust
  • Months between adjustments:  How frequently the loan will adjust; for home loans, this will usually be "12."
  • Expected adjustment: How much you expect the rate to change with each adjustment. You can play around with this figure to see what the range of possibilities might be, in terms of how rate changes will affect your monthly payments. Note that rates can fall as well as rise.
  • Interest rate cap: The maximum the interest rate can increase to over the life of the loan.

The calculator will generate your initial monthly payment, maximum monthly payment and the rate at which the loan will be paid down over time. Clicking the "View report" button will open a page with a more detailed report showing how your monthly payments will change with each adjustment, your total interest vs. principle payments, and an amortization schedule detailing payments, interest charges and principle balances over the life of the loan.

 

Want a personalized mortgage rate quote tailored specifically for you? Click the "Get Free Quote" button at the top of the page.

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