Fixed Rate Mortgage vs. Interest Only ARM calculator
This Fixed-Rate Mortgage vs. Interest-Only ARM Calculator will compare the monthly mortgage payments each type of loan. The fixed-rate payment will be based on a fully amortized loan, paying both principal and interest, while the interest-only payment will an adjustable-rate mortgage in which you make no payments toward loan principle. For comparison, the calculator will also show you payments for the ARM as a fully amortizing loan, as well as total interest costs for all three loans and amortization schedules for all three loans.
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Monthly payment: $666.67
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Maximum monthly payment: $1,528.82
Total Payments $421,036
Principal Balances by Year
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Interest Only Adjustable Rate Mortgage (ARM)
This calculator shows an Interest Only ARM. The length of the loan is 30 years, with the initial interest rate fixed for the interest only payment period. After the fixed interest rate period has passed, the interest rate and payment adjusts at the frequency specified and the loan is recast to fully amortize over the remaining term of the loan.
|ARM Type||Months Fixed|
|30 year fixed||Interest only payments at a fixed rate for 15 years. After 15 years, the loan is recast to fully amortize the outstanding balance over the remaining 15 year term of the loan.|
|10/1 ARM||Interest only payments at a fixed rate for 10 years. After 10 years, the loan is recast to fully amortize the outstanding balance over the remaining 20 year term of the loan.|
|7/1 ARM||Interest only payments at a fixed rate for 7 years. After 7 years, the loan is recast to fully amortize the outstanding balance over the remaining 23 year term of the loan.|
|5/1 ARM||Interest only payments at a fixed rate for 5 years. After 5 years, the loan is recast to fully amortize the outstanding balance over the remaining 25 year term of the loan.|
|3/1 ARM||Interest only payments at a fixed rate for 3 years. After 3 years, the loan is recast to fully amortize the outstanding balance over the remaining 27 year term of the loan.|
Original or expected balance for your mortgage.
Starting interest rate
Initial annual interest rate for this mortgage.
Starting monthly payment
Monthly principal and interest payment (PI) based on your beginning balance and starting interest rate.
Total of all monthly payments over the full term of the mortgage. This total payment amount assumes that there are no prepayments of principal.
Total of all interest paid over the full term of the mortgage. This total interest amount assumes that there are no prepayments of principal.
Months before first adjustment
This is the number of months that the interest rate is fixed. After this period, the interest rate will be subject to rate adjustments.
Months between adjustments
The number of payment periods between potential adjustments to your interest rate. The most common is 12 months, which means your payment could change at most once per year.
The amount you believe that your mortgage's interest rate will change. This amount will be added to or subtracted from your interest rate.
Interest rate cap
This is the highest interest rate allowed by your mortgage. Your actual interest rate will not be adjusted above this rate.
Fixed-rate vs. interest-only mortgages
A fixed rate mortgage has a fixed mortgage rate for the entire term of the loan. Typically, a fixed rate mortgage has a 15- or 30-year term. Payments for a fixed rate mortgage are amortized over the term of the mortgage so that principal and interest payments are made so that the mortgage is completely paid off at the end of the mortgage term.
Interest- only ARMs are adjustable-rate mortgages, which usually have a fixed rate for a certain length of (usually 5, 7, or 10 years), after which the rate begins to periodically adjust to reflect market interest rates.
ARMs are typically described by the number of years the rate is fixed, and then the frequency the rate adjusts. So an ARM that has a fixed rate for five years and then adjusts every year after that would be a 5/1 ARM. One that is fixed for seven years and then adjusts every two years would be a 7/2 ARM.
Interest-only mortgages are a special type of loan in which you are not required to make any payments toward the loan principle – you only pay the interest charges as they arise. This is not an open-ended deal – eventually you have to repay the principle, either as a single lump sum "balloon" payment or by switching to a fully amortizing loan schedule. But for that length of time, they allow you to make very small loan payments compared to a fully amortizing loan.
Here are some of the more common situations where borrowers use an interest-only mortgage:
- As a construction loan to cover the cost of the property and home construction, converting to a fully amortizing loan when the home is completed
- By high net worth borrowers who don't want to tie up their capital in a residence, and are content to periodically refinance into a new interest-only loan.
- For borrowers who are looking at the property as an investment, plan to sell it within a few years and want to minimize expenses.
These days, interest-only home purchase mortgages typically require a substantial down payment and excellent credit. While interest-only ARMs were once popular with cash-strapped borrowersof modest means seeking to maximize their purchasing power, that type of lending has long since dried up.
Fixed Rate vs. Interest Only Calculator Overview
The calculator will show what your monthly payments would be for all three loan types: fully amortizing fixed-rate, fully amortizing ARM and interest-only ARM. It will also show you the total interest costs for the three loans and amortization schedules for all three.
Enter the information for each loan. Note the following:
- The mortgage amount and term in years entered under "fixed-rate mortgage" will be used for all three loans
- The "months rate fixed" is how long the ARM will remain the same rate before adjusting.
- Expected adjustment: The calculator assumes the rate will adjust annually after the fixed-rate period ends. Note this can be a negative figure as well as positive.
- Interest rate cap: the highest the interest rate is allowed to go during the life of the loan
- Clicking on the descriptions of each entry item will provide definitions and further explanations.
When you have entered all your information, click "Calculate" and then "View report" for a comparison of the three loans and amortization schedules.
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