ARM vs Fixed Mortgage Calculator

• Models 5/1, 7/1 and 10/1 ARMs with a margin-based reset: the new rate is the index plus the margin, held to the first-reset, periodic and lifetime caps.
• Shows the payment every year of the loan under flat, rising and falling index paths, next to the fixed loan.
• Totals the interest over 5, 7, 10 years and the full term, so you can match the comparison to how long you expect to keep the loan.
• Finds the break-even rate: the rate after the first reset at which the ARM and the fixed loan cost the same.

How to use this calculator

Enter the loan amount, the fixed rate you were quoted, the ARM type and its starting rate. Then enter the current index, which for today's ARMs is a 30-day average of SOFR, and choose the rate caps on your loan estimate. The caps are written as three numbers: the most the rate can rise at the first reset, at each later reset, and in total over the life of the loan.

Open Advanced to change the margin, the loan term, how fast the index moves in the rising and falling cases, and the number of years used for the headline comparison.

How an adjustable-rate mortgage works

The first number in "7/1" is the number of years the rate is fixed. The second is how often it adjusts afterwards, here once a year. Many current conforming SOFR ARMs actually adjust every six months (written 5/6, 7/6 or 10/6), with caps such as 2/1/5 or 5/1/5. This calculator models one reset a year as a simplification, so treat its figures as an approximation for six-month ARMs and read your Loan Estimate for the real schedule.

At each reset the lender takes the index, adds the margin, which is fixed for the life of the loan, and rounds the result to the nearest eighth of a percent. That is the fully indexed rate. The change is then held by caps:

• First-reset cap. The most the rate can move at the first adjustment, often 2 or 5 points.
• Periodic cap. The most it can move at each later adjustment, commonly 2 points.
• Lifetime cap. The most it can rise above the starting rate in total, commonly 5 or 6 points.

The payment is recalculated on the remaining balance over the remaining term, so a higher rate raises it right away.

ARMs are priced on SOFR, not LIBOR

Older ARMs were tied to LIBOR, which has been retired. Conventional ARMs sold to Fannie Mae now use a 30-day average of the Secured Overnight Financing Rate (SOFR), published by the Federal Reserve Bank of New York. SOFR is based on overnight borrowing secured by Treasury securities, and it moves with the Federal Reserve's policy rate. Fannie Mae's guidelines also say the margin cannot exceed 3.00 percentage points, with most conventional ARMs between 2.25 and 2.75, and that the rate can never fall below the margin.

If you have an older ARM tied to LIBOR, your lender has already replaced the index with a SOFR-based one, and the loan documents say which.

A worked example

Borrow $400,000 for 30 years. The fixed loan is 6.5% with a payment of $2,528. A 7/1 ARM starts at 5.75%, with a payment of $2,334, which saves $194 a month or about $16,294 over the seven fixed years. The margin is 2.75%, the index is 3.9%, and the caps are 5/2/5.

If the index stays where it is, the first reset puts the rate at 6.65%, rounded to 6.625%, and the payment becomes $2,523, about the same as the fixed loan. Over 10 years the ARM costs $221,910 in interest against $242,497 for the fixed loan. If the index rises half a point a year, the first reset hits the cap, the rate climbs to 10.125%, the payment reaches $3,491 and 10-year interest is $263,492. If the index falls half a point a year, 10-year interest is $182,439.

The worst payment at the first reset, if the rate jumped by the full 5-point cap, is $3,496. The break-even rate over 10 years is 8.55%: the ARM wins if the rate after the reset stays below that, and loses if it goes above.

Why caps matter more than the starting rate

A cap structure of 2/2/5 limits the first jump to 2 points; 5/2/5 allows a 5-point jump at the first reset. Take a 5/1 ARM with 2/2/5 caps: the worst first-reset payment in this example is $2,803, because the rate can climb only to 7.75% at the first reset. A 10/1 ARM with 5/2/5 caps resets three years later than the 7/1, which gives you three more years at the low rate; its worst first-reset payment is $3,375, on a balance that has had ten years to fall.

Look at the lifetime cap too. It is the worst case you must be able to afford: the highest possible payment in this example is $3,496 a month.

When an ARM can make sense

An ARM has the best case when you are fairly sure you will sell or refinance before the fixed period ends, or when you can comfortably afford the lifetime-cap payment. A 5/1 ARM suits someone who expects to move within five years; a 10/1 is a longer commitment that behaves like a fixed loan for a decade. The risk is that selling or refinancing is not always possible when you want it: a drop in home values, a change in your income or higher rates can all stand in the way.

Assumptions and limitations

• Index scenarios are assumptions. The rising and falling paths move by a fixed amount each year, which real indexes do not.
• Yearly resets. Many conforming SOFR ARMs adjust every six months, with different caps, so the real payment path can differ.
• Principal and interest only. Taxes, insurance and mortgage insurance are the same on both loans and left out.
• Interest, not total payments, is compared. Principal repaid builds equity, so interest paid is the true cost of borrowing.
• No refinancing or prepayment. The calculator holds each loan to the end of the horizon.
• Fees. Closing costs and any rate buydown differences are not modelled. Use your loan estimate for exact index, margin and caps.

Common mistakes

Judging by the starting rate. The teaser rate lasts only until the first reset. The margin and caps decide what happens next.

Planning to refinance. A refinance may cost money or not be available. Make sure you could handle the first-reset payment without it.

Checking only the first cap. The lifetime cap is the number that sets your worst case.

Assuming the index will stay flat. Use the rising case to see the risk.

Frequently asked questions