What is an adjustable-rate mortgage?

An ARM is a home loan with an interest rate that is fixed for an initial period (often 5, 7, or 10 years) and then adjusts periodically based on a market index plus a margin. The start rate is usually lower than fixed rates; the later rate can rise or fall.

What does 5/1 ARM mean?

The rate is fixed for the first 5 years, then adjusts once per year after that. Similarly, a 7/1 ARM is fixed for 7 years and a 10/1 for 10 years, each adjusting annually afterward.

What are rate caps on an ARM?

Caps limit rate increases: the initial cap limits the first adjustment, the periodic cap limits each later adjustment, and the lifetime cap limits how far above the start rate the loan can ever go. Typical caps are 2/2/5, meaning 2%, 2%, and 5% respectively.

Can my ARM payment go down?

Yes. If the index falls, your adjusted rate falls too, down to any floor in your loan terms. The calculator models the worst case (rates rising), but ARMs genuinely adjust in both directions.

Is an ARM riskier than a fixed-rate mortgage?

Yes, because your payment can rise after the fixed period. The risk is bounded by the caps, and it matters less if you will sell or refinance before adjustments start. If you need payment certainty for 30 years, fixed is the safer choice.

What is the fully indexed rate?

The index value plus the lender's margin: the rate your ARM would charge if it adjusted today with no caps. It is the anchor the rate moves toward at each adjustment, which is why this calculator asks for it.

Should I get an ARM if I plan to move soon?

Often yes, if "soon" means before the fixed period ends. You get the lower start rate for the years you actually hold the loan and never face an adjustment. Just be honest about the timeline: life plans change, so check the worst case too.

ARM vs Fixed Mortgage Calculator

An adjustable-rate mortgage starts cheaper but can rise. This calculator models the worst-case ARM path, with rate caps, against a fixed-rate loan.

How adjustable-rate mortgages work

An ARM, such as a 5/1 ARM, offers a fixed interest rate for an initial period (5 years), then adjusts once per year (the 1) for the rest of the loan. After the fixed period, the rate becomes the index (a benchmark like SOFR) plus the margin (the lender's markup), together called the fully indexed rate. Each adjustment, the payment is recalculated on the remaining balance and remaining term at the new rate.

Fully indexed rate = index + margin

The attraction is the start rate, which is usually 0.5 to 1.5 percentage points below comparable fixed rates. The risk is everything after the fixed period: if market rates rise, so does your payment.

The caps that protect you

ARMs carry three caps that limit how fast the rate can climb. The initial cap limits the first adjustment (commonly 2%). The periodic cap limits each later annual adjustment (commonly 2%). The lifetime cap limits how far above the start rate the loan can ever go (commonly 5%). A 5/1 ARM with 2/2/5 caps starting at 5% can never exceed 10%, and it takes at least three adjustments to get there. Caps do not make ARMs safe, but they make the worst case computable, which is exactly what this calculator does.

How this calculator models the worst case

Nobody knows future rates, so the honest comparison is: how does the ARM look if rates rise as fast as the caps allow? The simulation holds the start rate through the fixed period, then raises the rate at each annual adjustment by the maximum the caps permit, until it hits the lower of the fully indexed rate and the lifetime cap. Each adjustment recalculates the payment on the remaining balance over the remaining term, exactly like a real servicer would. The fixed-rate path is standard amortization at the fixed APR. The breakeven year is the first year when cumulative ARM payments exceed cumulative fixed payments: before that, the ARM has cost less in total.

Worked example

$400,000 loan, 30 years. Fixed at 6.5%: monthly payment $2,528.27, total interest about $510,178. ARM 5/1 starting at 5% with 2/2/5 caps and a 7.5% fully indexed rate: the first payment is $2,147.29, saving about $381 a month for five years. Worst case, the rate climbs 2 points at year 6 (to 7%), then hits the 7.5% fully indexed rate at year 7, where it stays. Run the numbers and the ARM's worst-case total interest lands within a few percent of the fixed loan's, while the early savings are real money in your pocket for five years. The breakeven year tells you how long you must stay for the fixed rate to pull ahead.

How this is calculated: the fixed path uses standard amortization over the full term. The ARM path simulates month by month: the start rate applies through the fixed period, then at each annual adjustment the rate rises by the initial or periodic cap toward the minimum of the fully indexed rate and start rate plus lifetime cap. After every adjustment the payment is recomputed from the remaining balance and remaining months. Breakeven is the first year-end where cumulative ARM payments exceed cumulative fixed payments; if it never happens within the term, the ARM stays cheaper even in the worst case.

When an ARM makes sense

ARMs fit borrowers who will likely sell or refinance before the fixed period ends: people who expect to move within 5 to 7 years, who anticipate income growth that will make a higher later payment affordable, or who plan to pay the loan down aggressively during the cheap years. The math also favors ARMs when the start-rate discount is large. What ARMs do not fit is a tight budget with no room for the payment to rise: always check that you could afford the maximum payment, not just the first one.

The refinance escape hatch (and its cost)

Many ARM borrowers plan to refinance before adjustments begin. That works when rates cooperate and your home holds its value, but it is not guaranteed: if rates rise and prices fall at the same time, refinancing can be expensive or impossible. Treat the worst-case ARM outcome as the real cost of the loan, and view a future refinance as a bonus, not the plan.