- Adjustable-rate mortgage (ARM)
- A mortgage whose rate is fixed for an initial period and then resets at set intervals, based on a market index plus a margin, within rate caps. A 5/1 ARM is fixed for five years and then adjusts once a year. This calculator shows the payment before and after one adjustment to the rate you estimate.
- Initial rate
- The introductory interest rate during the ARM’s fixed period, often lower than a comparable fixed-rate loan. It sets the initial payment, which is figured as if the loan were fixed for the full term. That keeps the early payment low, but it says nothing about what the payment becomes after the reset.
- Fixed period
- The number of years the initial rate is locked before the first adjustment, such as 5 on a 5/1 ARM or 7 on a 7/1. A longer fixed period means more principal is paid down before the reset, so the new payment is calculated on a smaller balance over fewer remaining years.
- Adjusted rate
- The estimated rate after the fixed period ends. In practice it equals the index value at reset plus the margin, limited by the caps, and it can change again at each later adjustment. This calculator applies your estimate to the remaining balance and term to produce the payment after adjustment.
- Balance at adjustment
- The principal still owed when the fixed period ends. The new payment is calculated by amortizing this balance over the years left in the term at the adjusted rate. Early payments are mostly interest, so after five years of a 30-year loan at 5.5%, about 92% of the original amount is still owed.
- Payment change
- The difference between the payment after adjustment and the initial payment, sometimes called payment shock. A rise of two percentage points on a $320,000 loan can add several hundred dollars a month. Checking whether the budget absorbs this figure is the main reason to run this calculator.
- Rate caps
- Limits on how much an ARM rate can change: at the first adjustment, at each later adjustment, and over the life of the loan. They are set in the loan documents and vary by lender and product. This calculator does not apply caps, so enter an adjusted rate that the caps would actually allow.
- Index and margin
- The two parts of an ARM’s adjusted rate. The index is a published market rate that moves over time; the margin is a fixed percentage the lender adds, set when the loan is made. Once the fixed period ends, the new rate is index plus margin, subject to the caps.
- Loan term
- The length of time scheduled to repay the loan in full, including the fixed period. A longer term lowers each payment but keeps the balance outstanding longer, so total interest rises. On an ARM, the term that remains after the fixed period is the period over which the adjusted payment is spread.
