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Key takeaways
- On a $400,000 5/6 ARM starting at 5.75%, the payment is $2,334.29, which is $193.98 a month less than a 6.5% fixed loan for the first five years.
- With 2/1/5 caps, the worst case lifts the rate to 10.75% and the payment to $3,551.69, which is $1,217.40 more than the starting payment.
- If the rate never moves, total interest over 30 years is $440,345; in the worst case it is $796,519; the fixed 6.5% loan costs $510,178.
- An ARM suits people who expect to sell or refinance before the fixed period ends, or who can absorb the worst-case payment.
What this adjustable rate mortgage calculator does
It takes the terms of an ARM and shows what the loan can cost, not just what it costs at the start. You enter the starting rate, the fixed period, how often the rate adjusts and the three caps. The calculator then shows the starting payment, the worst-case payment allowed by your caps, the total interest in the worst case and in the case where the rate never changes, and a fixed-rate loan for comparison.
How an ARM works
For the first few years the rate is fixed, usually lower than a comparable fixed-rate loan. Afterward it resets at each adjustment date to an index plus a margin, but never by more than your caps allow. Each reset re-amortizes your remaining balance over the months left, so the new payment reflects both the new rate and the shorter remaining time.
Reading rate caps: 2/1/5
Caps are written as three numbers. 2/1/5 means the rate can rise at most 2 points at the first adjustment, at most 1 point at each later adjustment, and never more than 5 points above the starting rate. On a 5.75% start, the highest possible rate is 10.75%. Your loan estimate and ARM disclosure list your actual caps and the floor.
Worked example: $400,000, 5/6 ARM at 5.75%, caps 2/1/5, 30 years
| Period | Rate, worst case | Payment, worst case | Payment, rate unchanged |
|---|---|---|---|
| Years 1–5 | 5.75% | $2,334.29 | $2,334.29 |
| Year 6 | 7.75% | $2,802.64 | $2,334.29 |
| Year 7 | 9.75% | $3,297.42 | $2,334.29 |
| Year 8 onward | 10.75% | $3,551.69 | $2,334.29 |
Rates shown are at the start of each year. The worst case assumes the rate rises as fast as the caps allow, every time. A 6.5% fixed loan on the same amount would cost $2,528.27 a month. The ARM saves about $11,639 over the five fixed years, then risks costing much more. If the loan adjusts only once a year instead of every six months, the worst-case peak is $3,532.44, since the cap steps are spread over more time.
When an ARM can make sense
You expect to move or refinance soon
If you will sell before the fixed period ends, you never face the adjustments. Be realistic about timing, and remember you cannot be sure a refinance will be available on good terms. Test it with the refinance calculator.
You can afford the worst case
Treat the peak payment as the number you must be able to pay. Check it against your budget with the affordability calculator before choosing the ARM for its low start.
You are comparing it with a fixed loan
See the full cost of a fixed loan, and how term changes it, in the mortgage calculator and the 15 vs 30 year calculator.
Estimate only, for principal and interest. It assumes the rate rises or stays as described and ignores any rate floor, taxes, insurance and fees. Your lender’s ARM disclosure controls. Not a loan offer or financial advice.
Frequently asked questions
What does 5/6 ARM mean?
The first number is how many years the starting rate stays fixed. The second is how often the rate can change after that. On a 5/6 ARM the rate is fixed for 5 years and then adjusts every 6 months. On an older-style 5/1 ARM it adjusts once a year.
What do rate caps like 2/1/5 mean?
They limit how far the rate can move. The first number is the most it can rise at the first adjustment (2 points), the second is the most it can rise at each later adjustment (1 point), and the third is the most it can rise above the starting rate over the life of the loan (5 points). Common structures include 2/1/5 and 5/2/5, so check the one in your loan documents.
How is the new rate set?
After the fixed period, the rate is generally an index (a market benchmark) plus a fixed margin, limited by your caps. You cannot know the index in advance, which is why this calculator shows the worst case allowed by your caps and the case where the rate stays put.
Can an ARM payment go down?
Yes, if the index falls, though usually not below a floor set in the loan, often the margin. The calculator shows the unchanged-rate case as a baseline; your real result could be better or worse.
Is an ARM cheaper than a fixed-rate loan?
It is cheaper at first, since ARMs usually start with a lower rate. Whether it stays cheaper depends on how long you keep the loan and what rates do. If you will sell or refinance before the fixed period ends, only the starting payment matters. If you will keep the loan, the worst case matters.
What happens to my payment at each adjustment?
The lender recalculates the payment on your remaining balance, at the new rate, over the months left on the loan. That is why the payment can jump even when the rate moves only a point or two.