ARM vs Fixed Calculator
A lower ARM rate today versus certainty for 30 years. Compare the total cost of an adjustable-rate mortgage against a fixed-rate loan over your actual time horizon — flat rates and worst case.
Adjustable-rate mortgage
- Fixed total cost (10 yrs)$522,024.87
- ARM total cost — rates flat$490,076.45
- ARM total cost — worst case$552,029.82
- Worst case costs you extra$30,004.95
Total cost = payments made plus the remaining balance after 10 years, so both loans are compared fairly. The ARM amortizes over 30 years at 5.75% for the first 5 years, then adjusts yearly — worst case assumes the rate climbs 2.00% a year to 10.75%. If you'll sell or refinance before the fixed period ends, the ARM's lower start rate usually wins; past that, the fixed rate is the safe bet.
How the math works
A 5/1 ARM has two lives. For the first 5 years it's effectively a fixed-rate loan at the start rate — same payment math as any mortgage. Then it adjusts once a year: the new rate equals a market index plus the lender's fixed margin.
Three caps bound the damage. The initial cap limits the first adjustment (often 2%), the periodic cap limits each later adjustment (often 2%), and the lifetime cap limits the total rise above the start rate (often 5%). A 5.75% start with 2/2/5 caps can never exceed 10.75%, no matter what markets do.
At each adjustment, the lender recomputes your payment by re-amortizing — spreading your remaining balance over your remaining months at the new rate. That's why the payment can jump even though you owe less than before: the rate effect swamps the balance effect.
The calculator runs two scenarios. Flat rates holds the ARM at its start rate forever, showing the pure value of the initial discount. Worst case raises the rate by the maximum at every adjustment until the lifetime cap — the highest payment the contract allows. Total cost means every payment in your horizon plus the remaining balance at the end, so a loan with cheaper payments but a fatter leftover balance is judged fairly.
Worked example
$320,000 loan. The 30-year fixed at 6.75% costs $2,075.51/month. The 5/1 ARM at 5.75% costs $1,867.43 — saving $208.08/month, or $12,485 over the 5 fixed years. After 5 years the ARM balance is $296,839.
Now the two scenarios for year 6. Flat: the rate stays 5.75% and the savings continue. Worst case (2% annual, 5% lifetime caps): the rate jumps to 7.75% and the payment is recomputed on the remaining balance — $2,242.11, suddenly $167/month more than the fixed loan. Year 7 could reach 9.75% and $2,635.23.
The lesson: if you'll sell or refinance within 5 years, the ARM's discount is nearly free money. Every year past the fixed period, you're gambling that rates stay calm.
What to watch for
- Match the fixed period to your horizon — plus a margin. If you might stay 7 years, a 5/1 ARM is a bet; a 7/1 ARM is a plan.
- Budget for the capped payment, not the start payment. If you couldn't afford $2,635/month on this loan, the ARM is too much risk no matter how nice $1,867 looks.
- Read the caps, not just the rate. A 5/2/5 structure and a 2/2/5 structure behave very differently at the first adjustment.
- Ask for the fully indexed rate. A start rate far below index-plus-margin is a teaser designed to reset upward.
- Have an exit that doesn't require refinancing. Rate forecasts and rising markets both fail at the worst moments — selling on schedule is the only exit you control.
Frequently asked questions
How does an ARM work?
An adjustable-rate mortgage (like a 5/1 ARM) has a fixed rate for the first 5 years, then adjusts once a year based on a market index plus a margin. Annual caps limit how much it can rise per adjustment (often 2%), and a lifetime cap limits the total increase (often 5% above the start rate).
When is an ARM better than a fixed-rate mortgage?
Usually when you'll sell or refinance before the fixed period ends. The ARM's lower start rate means lower payments during the years you're sure about — this calculator shows the savings if rates stay flat. Past the fixed period, the fixed-rate loan is the predictable, safe bet.
What is the worst-case scenario?
Rates rise by the maximum allowed at every adjustment until they hit the lifetime cap — e.g., a 5.75% start rate with 2% annual and 5% lifetime caps could reach 10.75%. The calculator recomputes your payment on the remaining balance at each step, so you see the highest payment you'd ever face.
What does 'total cost' include?
Every payment you'd make during your time horizon plus the remaining loan balance at the end — so a loan with lower payments but a higher leftover balance is compared fairly. It doesn't include taxes, insurance, or the opportunity cost of the rate difference.
What do the numbers in '5/1 ARM' mean?
The first number is how many years the rate stays fixed (5); the second is how often it adjusts after that (every 1 year). So a 5/1 ARM is fixed for 5 years, then adjusts annually. A 7/6 ARM is fixed 7 years, then adjusts every 6 months. The longer the fixed period, the closer the start rate is to fixed-rate pricing.
Can my ARM payment go down as well as up?
Yes — if the underlying index falls at an adjustment date, your rate (and payment) drops, subject to the caps and any floor in your note. That's the upside this calculator's 'flat rates' case approximates. But lenders price ARMs expecting the start-rate discount to be the main attraction, not future drops.
What is the fully indexed rate — and why does it matter?
The index value plus the lender's margin — the rate your ARM would charge without any teaser discount or caps. If the start rate is 5.75% but the fully indexed rate is 7%, the loan is designed to adjust upward. Always ask for this number; it's the honest price of the loan.
Is it hard to refinance out of an ARM before it adjusts?
Usually not, if your credit, income, and home value still qualify — a refinance is just a new loan application. The risk is that all three can move against you at once: a job loss, a credit ding, or falling home values can arrive exactly when the adjustment does. Never take an ARM you couldn't afford at the capped payment.