Adjustable Rate Mortgages (ARM) Calculator
Adjustable Rate Mortgages (ARM)
- How to use an adjustable rate mortgage (ARM) calculator?
- What is an adjustable-rate mortgage (ARM)?
- How does an adjustable rate mortgage work?
- Types of Adjustable Rate Mortgages (ARM)
- How are variable rates on adjustable rate mortgages determined?
- Pros And Cons Of An Adjustable Rate Mortgage (ARM)
How to use an adjustable rate mortgage (ARM) calculator?
Calculate your ARM mortgage (also called variable-rate mortgages or floating mortgages) with our calculator. Fill in the fields for the planned loan, select the type of adjustable interest rate (you can also choose an individual ARM), click Calculate and you will receive all the details for your loan also by clicking view result you can see the amortization table.
What is an adjustable-rate mortgage (ARM)?
An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate applied to the outstanding balance changes over the life of the loan. With an adjustable-rate mortgage, the initial interest rate is fixed for a specific period. After this initial period, the interest rate resets periodically, at yearly or even monthly intervals. ARM is also referred to as a variable rate mortgage or floating mortgage. The interest rate for ARM resets based on a benchmark or index plus an additional spread called an ARM margin.
How does an adjustable rate mortgage work?
ARMs are long-term home loans that have two distinct phases, known as the fixed period and the adjustable period.
- Fixed period: First, there is an initial fixed-rate period (usually the first 5, 7, or 10 years of the loan) during which your interest rate will not adjust.
- Adjustment period: After that, your interest rate can go up or down depending on changes in the benchmark.
Types of Adjustable Rate Mortgages (ARM)
There are various possible layouts to choose from if you are interested in ARM. Here's a deeper look at your alternatives.
5/1 and 5/6 Adjustable Rate Mortgages
The interest rate on mortgage loans with a floating rate of 5/1 and 5/6 is set during the first 5 years of the loan term. The second number indicates how often the rate is adjusted after the first five years. The 5/1 floating rate mortgage rate changes once a year. The 5/6 ARM rate is adjusted every 6 months. Speed limits may also apply with credit. So what is the marginal rate? In real estate, the word 5/1 (2/2/5) can be used to refer to a 5/1 floating-rate mortgage. The second set of numbers - 2/2/5 - refers to the rating cap details. Here are some examples:
- The first '2' is the cap or limit on how much your initial reset can change your interest rate. In other words, after the initial 5-year introductory term, your ARM may adjust your interest rate by 2% in the 6th year.
- Post Adjustment Limit: The second '2' is the maximum amount that subsequent rate cuts can increase your interest rate. As a general rule, the normal margin for post-adjustment is 2%. This means your interest rate could rise by as much as 2% in year 7.
- The Lifetime Adjustment Limit determines how much the interest rate can rise overall over the life of the loan. In our case, the interest rate can only increase by 1% in year 8 and beyond: 5% (overall term limit) minus 2% (year 1 adjustment) minus 2% (year 2 adjustment) equals 1%.
Most ARMs have a lifetime adjustment limit of 5%, but there are higher lifetime limits that can cost you significantly more in the long run. If you're considering getting an ARM, make sure you understand how marginal rate quotes are set up and how much your monthly payments could increase if interest rates rise.
7/1 and 7/6 Adjustable Rate Mortgages
7/1 and 7/6 ARM have a fixed rate for 7 years. At 30 years, this will result in variable payments based on changes in interest rates over the next 23 years after the end of the original fixed rate period.
Remember that the interest rate can rise or fall, causing your mortgage payment to go up or down to cover your budget.
10/1 and 10/6 ARM
The fixed rate of 10/1 and 10/6 ARM is valid for the first ten years of the loan. After that, the interest rate will fluctuate depending on market conditions. If you take the 30-year term, you will have 20 years of variable payments.
How are variable rates on adjustable rate mortgages determined?
The performance of one of three main indexes is used to determine most ARM metrics:
- Fixed-Maturity Weekly Yield on 1-Year Treasury Bills: Income paid by U.S. Treasury debt securities tracked by the Federal Reserve Board.
- 11th District Cost of Fund Index (COFI): The interest rate that banking institutions in the western United States pay on deposits.
- SOFR (Overnight Secured Funding Rate): SOFR has replaced the London Interbank Offered Rate (LIBOR) as the benchmark for ARM.
The index followed by ARM is specified in the loan documentation. Mortgage lenders set ARM rates by taking the index rate and adding an agreed number of percentage points, known as margin. The index rate may fluctuate, but not the margin. For example, if the index is 1.25 percent and the margin is 3 percentage points, the interest rate is 4.25 percent. If the index drops to 1.5% in a year, the interest rate on your loan will jump to 4.5%.
Advantages and disadvantages of adjustable rate mortgage ARM
- A lower starting interest rate means lower monthly payments and the ability to put more money into paying off the principal.
- Interest rates and monthly payments can be reduced.
- The interest rate cannot rise above the upper limit.
- Even at the maximum set, interest rates and monthly payments can rise to unmanageable levels.
- A structure that is more complex and may be difficult to understand.
- Possibility of penalty for early repayment.
By offering a lower interest rate for the first few years of a loan, adjustable-rate mortgages trade long-term confidence for upfront savings. They are often suitable for borrowers who do not intend to stay in their home for an extended period of time or who intend to refinance in a few years. If you want to stay in your home for decades, ARM can be dangerous because your mortgage payments can increase significantly after the flat rate period ends. If you're buying yourself a permanent home, consider whether an ARM is right for you.