ARM vs Fixed Rate Calculator
Compare an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. See initial savings with the ARM and how rate adjustments affect payments over time.
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Visualization
How It Works
An adjustable-rate mortgage (ARM) offers a lower initial rate for a set period (e.g., 5 years on a 5/1 ARM), after which the rate adjusts annually based on a market index. A fixed-rate mortgage keeps the same rate for the entire term. This calculator projects year-by-year payments to help you compare the total cost of each option.
The Formula
ARM Rate (after fixed period) = Initial Rate + Annual Adjustment x Years Past Fixed Period
ARM Rate is capped at the Lifetime Rate Cap
Variables
- P — Loan principal amount
- r — Monthly interest rate for the current period
- n — Remaining months on the loan
- Rate Cap — Maximum rate the ARM can ever reach
Worked Example
A $300,000 loan: the 30-year fixed at 6.5% costs $1,896/month. A 5/1 ARM at 5.5% starts at $1,703/month, saving $193/month for 5 years ($11,580 total). If rates rise 0.5%/year after that, the ARM payment eventually exceeds the fixed payment.
Practical Tips
- ARMs make sense if you plan to sell or refinance before the fixed period ends.
- Understand your ARM caps: initial adjustment cap, annual cap, and lifetime cap protect against extreme rate jumps.
- A 5/1 ARM means the rate is fixed for 5 years, then adjusts every 1 year.
- If rates are expected to decline, an ARM lets you benefit without refinancing.
- Always compare the worst-case ARM scenario (rate hitting the cap) to see if you can still afford the payment.
Frequently Asked Questions
What does 5/1 ARM mean?
The first number (5) is the years the rate stays fixed. The second number (1) is how often it adjusts afterward. A 5/1 ARM is fixed for 5 years, then adjusts annually.
What is an ARM rate cap?
Rate caps limit how much the ARM rate can change. A typical 5/1 ARM has a 2/2/5 cap structure: up to 2% increase at first adjustment, up to 2% per year after, and up to 5% increase over the life of the loan.
Are ARMs risky?
ARMs carry rate risk. If interest rates rise significantly, your payment could increase substantially. However, rate caps limit the worst-case scenario, and you can always refinance to a fixed rate.
What index do ARMs follow?
Most ARMs are tied to the Secured Overnight Financing Rate (SOFR), which replaced LIBOR. Your ARM rate equals the index rate plus a fixed margin (typically 2-3%).
Can I refinance out of an ARM?
Yes. Many borrowers take an ARM for the initial savings and plan to refinance to a fixed rate before the adjustment period begins. Just factor in refinancing costs.