An adjustable-rate mortgage trades certainty for a lower starting rate. For the first few years your payment is fixed and often noticeably cheaper than a 30-year fixed loan. After that, the rate follows a market index, and only the caps in your loan contract limit how far it can move. This ARM calculator shows the payment during the fixed period, what happens at each reset if the index stays where it is, the worst case the caps allow, and how it compares with a fixed-rate loan.
How to use the ARM calculator
- Enter the loan amount, term and initial rate.
- Pick the initial fixed period and how often the rate adjusts afterward. A 5/6 ARM is fixed for 5 years, then adjusts every 6 months.
- Enter the current index value (for most new loans, the 30-day average SOFR) and the loan’s margin.
- Enter the three caps: first adjustment, later adjustments and lifetime.
- Optionally enter a fixed rate to compare.
How ARM payments are recalculated
At each reset, the new rate is:
The result is rounded to the nearest 1/8 of a percent. The payment is then recalculated so the remaining balance pays off over the remaining months:
Here B is the balance at the reset, r the new monthly rate and m the months left. The calculator assumes the floor equals the margin, as is common.
Worked example
A $320,000, 30-year 5/6 ARM starts at 5.875% with 2/1/5 caps, a 2.75% margin and an index of 4%.
- Years 1–5: $1,892.92 a month. A 6.5% fixed loan would cost $2,022.62, so the ARM saves $7,782 over the fixed period.
- Fully indexed rate: 4% + 2.75% = 6.75%. If the index stays flat, the first reset moves the rate to 6.75% and the payment to $2,054.15 on the $297,310 balance.
- Worst case: the rate jumps to 7.875% at the first reset, then rises 1 point every six months to the 10.875% ceiling.
| Reset | Worst-case rate | Worst-case payment |
|---|---|---|
| Year 6 | 7.875% | $2,270.12 |
| Year 6.5 | 8.875% | $2,467.19 |
| Year 7 | 9.875% | $2,668.24 |
| Year 7.5 onward | 10.875% | $2,872.73 |
If the index stays flat, total interest is $409,820, almost the same as the fixed loan’s $408,142. In the worst case it reaches $648,119.
ARM or fixed?
An ARM tends to come out ahead when:
- you are fairly sure you will sell, refinance or pay off the loan before the first reset;
- the gap between ARM and fixed rates is wide;
- you can comfortably afford the worst-case payment and have reserves.
A fixed-rate loan is safer if you plan to stay for decades, your budget is tight, or rates are already low. Federal disclosure rules require lenders to give you the CFPB’s Consumer Handbook on Adjustable-Rate Mortgages and a loan-specific disclosure showing the index, margin, caps and an example of how payments can change. Use them to fill in this calculator.
Compare the fixed alternative in the mortgage calculator. Explore refinancing before a reset with the refinance calculator, or see a loan with an interest-only period in the interest-only mortgage calculator.
Estimates only. Index values change daily, and your note's rounding, floor and cap structure control the real payments.
Frequently asked questions
How does an adjustable-rate mortgage work?
An ARM charges a fixed introductory rate for a set period, commonly 3, 5, 7 or 10 years. After that the rate resets at regular intervals to the index plus a fixed margin, within limits set by rate caps. Most new ARMs use the 30-day average SOFR as the index and reset every six months, as in a 5/6 ARM.
What do ARM caps like 2/1/5 mean?
The first number limits the first adjustment, here to 2 percentage points above or below the start rate. The second limits each later adjustment, here 1 point. The third caps the total increase over the life of the loan, here 5 points above the initial rate. A 5.875% loan with 2/1/5 caps can never go above 10.875%.
What is the fully indexed rate?
It is the index plus the margin, the rate the loan would reset to if the caps did not limit it. With a 4% index and a 2.75% margin it is 6.75%. Lenders often use it, or the highest rate in the first five years, to check whether you can afford the loan after it adjusts.
What is the worst-case ARM payment?
It is the payment if the rate rises by the maximum the caps allow at every reset until it hits the lifetime ceiling. For a $320,000, 30-year 5/6 ARM starting at 5.875% with 2/1/5 caps, the payment could climb from $1,892.92 to $2,872.73 by year eight.
When does an ARM make sense?
An ARM can save money when you expect to sell or refinance before the fixed period ends, or when ARM rates are well below fixed rates. The risk is payment shock if you stay longer and rates rise. Make sure you could handle the worst-case payment.