ARM vs fixed rate calculator
What an adjustable rate saves you while the starting rate holds, and what it costs if the rate climbs as far as your caps allow.
Saved a month for 5 years
$218.00
2,626 on the ARM against 2,844 fixed — but the ARM can reach 10.75%
- Saved over the fixed period
- $13,094
- Worst-case payment
- $3,988.00
- Saving wiped out after
- 23 months
| Fixed repayment | $2,844.00 |
|---|---|
| ARM starting repayment | $2,626.00 |
| Fixed interest over 30 years | $573,950 |
| ARM interest if the rate never moves | $495,388 |
| ARM interest at the cap ceiling | $890,632 |
- If rates rise as fast as the caps permit, the 13,094 saved during the fixed period is gone 23 months after the first adjustment.
- The worst case assumes the index rises far enough to hit every cap. That is the contract, not a forecast — the point is that it is the exposure you have agreed to, not that it is likely.
- Each adjustment re-amortises the remaining balance over the remaining term, which is why the payment jumps by more than the rate change alone would suggest.
The ARM saves $218 a month for five years. If it then rises to its 10.75% ceiling, that $13,094 head start is gone within 23 months of the first adjustment.
How this is calculated
How this is calculated
Both loans, month by month
Each loan is amortised on a level instalment that clears the balance over the term. At 6.5% on $450,000 over 30 years that is $2,844.31 a month; the ARM at 5.75% starts at $2,626.08.
payment = P · i / (1 − (1 + i)^−n)What the caps permit
A 2/2/5 set caps the first adjustment at 2 points, each later one at 2, and the rate at 5 above the start. From 5.75% that is a 10.75% ceiling, reached three adjustments after the fixed period ends.
ceiling = start rate + lifetime capRecast, and the break-even
Every adjustment re-amortises the remaining balance over the remaining term: $417,430 with 25 years left at 7.75% costs $3,153, a 20% rise from 2 points. The $13,094 saved is consumed 23 months after that.
Worked example: $450,000, 5/1 ARM at 5.75% with 2/2/5 caps against a 6.5% fixed
| Amount borrowed | $450,000 |
|---|---|
| Fixed rate | 6.5% |
| ARM starting rate | 5.75% for 5 years |
| Caps | 2 / 2 / 5 |
| Saved each month | $218.23 |
|---|---|
| Saved over five years | $13,094 |
| Worst-case rate | 10.75% |
| Worst-case payment | $3,988 |
The ceiling is the number that matters: 10.75% is 4.25 points above the fixed rate on offer, and the contract permits it within three years of the first adjustment.
What this assumes
- The worst case assumes every cap is triggered at the earliest date allowed.
- The rate-holds case assumes the starting rate never changes after the fixed period.
- Each adjustment re-amortises the remaining balance over the remaining term.
- No property tax, insurance, mortgage insurance or fees are included.
- No extra repayments, redraw or offset.
Where this commonly goes wrong
- The lifetime cap is the number to check first. Two loans quoted at the same starting rate with 5 and 6 point ceilings are not the same product, and the difference on $450,000 is tens of thousands of dollars.
- A first-adjustment cap is often larger than the periodic cap — 5/2/5 is common — so the single biggest jump is usually the first one, exactly when a borrower has stopped watching.
- Caps limit the rate, not the payment. A 2-point rise on a recast balance raised the payment 24% in the example above, which is the shock people describe as coming out of nowhere.
- Comparing the starting rates alone is the mistake the product is designed around. The teaser is always lower; the question is only what happens after it.
Questions
What do the numbers in a 5/1 ARM mean?
The first is how many years the starting rate is fixed for, the second how often it adjusts after that. A 5/1 is fixed for five years then adjusts annually; a 7/6 is fixed seven years then adjusts every six months. Neither number tells you how far the rate can move — that is the cap set.
What are 2/2/5 caps?
Three separate limits: the most the rate can move at the first adjustment, the most at each later one, and the most it can ever sit above the starting rate. From 5.75%, a 2/2/5 set means a 7.75% rate at the first adjustment and a 10.75% ceiling it can never pass.
Is an adjustable rate ever the better choice?
When the fixed period comfortably outlasts how long you expect to hold the loan. If you are confident of selling or refinancing inside five years, a 5/1 hands you the lower rate for the whole time you own it. The risk is entirely in the years after the fixed period.
How much can my payment actually rise?
Take the starting rate plus the lifetime cap and price the remaining balance over the remaining term at that rate. On the example above the payment goes from $2,626 to $3,988 — a rise of $1,362 a month, which is the figure worth testing your budget against.
Can I just refinance if rates go up?
Sometimes, but the conditions that push rates up are the conditions that make refinancing hardest. Refinancing needs sufficient equity, an acceptable income and a rate worth moving to, and a borrower who needs it most is the one most likely to fail one of those tests.
Why does this show a worst case rather than a forecast?
Nobody can forecast a rate index over 25 years, and a calculator that pretends otherwise is guessing with your money. The cap ceiling is different: it is a term of the contract, so it is the one number about the future that is actually knowable today.
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Sources
This calculator does arithmetic on the figures you enter. It does not account for tax, fees, or your personal circumstances.
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