What this calculator does
It shows the payment an adjustable-rate mortgage (ARM) could have after its fixed period, step by step, alongside the worst case its rate caps permit.
An ARM starts with a rate that is fixed for a set number of years. After that, the rate resets at regular intervals to follow a published index, and the payment is recalculated each time. The start payment is the one everyone compares, but it only lasts for the fixed period. The payment you live with afterward depends on the index, your margin and your caps.
Enter the loan, the start rate, the fixed period and how often the loan adjusts, the rate you expect when it does, and the caps from your loan documents. You get the payment after the first adjustment, the first six adjustments of your scenario, and a chart comparing it with the worst case.
How the math works
When the fixed period ends, the lender adds two numbers to find the fully indexed rate: the current value of the index named in your note, a benchmark rate that moves with the market, and your margin, a fixed number of percentage points set at closing. That is the rate you enter in “Rate you expect”.
The caps then limit how far the rate can actually move:
- Initial cap: the most it can change at the first adjustment.
- Periodic cap: the most it can change at each later adjustment.
- Lifetime cap: the most it can ever be above the start rate. This calculator applies it below the start rate too.
Caps can be written as three numbers in that order, such as 2/1/5. At each adjustment the calculator keeps your expected rate within the lifetime limits and at or above 0%, then moves the current rate toward it by no more than that adjustment's cap. The new payment is the one that would repay the remaining balance over the remaining months at the new rate:
- M
- new monthly principal and interest
- B
- balance on the day the rate changes
- r
- new rate ÷ 12
- n
- months left in the term
Because n shrinks with every adjustment, the same rate on a smaller balance over fewer months gives roughly the same payment, so the payment changes mainly when the rate does. The worst case runs the same steps with the expected rate set to the lifetime ceiling, so the rate rises by the full cap at every adjustment until it gets there.
Worked example
You borrow $320,000 on a 7/6 ARM: 30 years, a start rate of 5.5%, fixed for 7 years, then adjusting every 6 months, with caps of 2/1/5. You expect index + margin to be 8% when the fixed period ends.
Worked example
- Fixed period: 84 payments of $1,816.92. After them, you owe $284,211.
- First adjustment, month 85 (year 8): the expected 8% is 2.5 points above the start rate, but the initial cap allows only 2, so the rate becomes 7.5%.
- New payment: $284,211 over the remaining 276 months at 7.5% is $2,163.95, up $347.03 a month.
- Second adjustment, month 91 (year 8): the periodic cap would allow 1 more point, and only 0.5 is needed to reach 8%. The payment becomes $2,253.77 and stays there while the index holds.
- Worst case: the rate steps through 7.5%, 8.5%, 9.5%, 10.5%, reaching the 10.5% ceiling at month 103 (year 9).
The payment rises from $1,816.92 to $2,253.77 in this scenario, and could reach $2,717.77 if the index climbed as fast as the caps allow.
The initial cap did real work here: without it, the payment would have jumped straight to the 8% level at the first adjustment. Set the initial cap to 5 in the calculator and the whole increase arrives at once.
Common mistakes
- Judging the loan by its start payment. The start payment lasts only for the fixed period. The payment after the first adjustment, and the worst case the caps allow, are part of the same loan.
- Reading caps as percentages of the rate. Caps are percentage points. A 2-point cap on a 6% rate allows 8%, not 6.12%.
- Measuring the lifetime cap from the wrong place. It is counted from the start rate, not from the index or the expected rate. Your note may also state the maximum rate outright.
- Assuming the rate can only rise, or can fall freely. Rates can fall at an adjustment, but a floor in your note can stop the decline well above 0%.
- Treating your expected rate as a forecast. The index changes over time, and nobody knows its value years ahead. That is why the worst case is shown next to your scenario.
Limits of this estimate
- Your scenario holds index + margin at the single rate you enter. Real indexes move, so later adjustments will differ.
- Caps are applied in both directions and the rate never goes below 0%, nor more than the lifetime cap below the start rate. Your note's floor and decrease limits may differ.
- Interest-only ARMs and payment-option ARMs, where the balance can grow, are not modeled. For an interest-only period, see the interest-only calculator.
- Rounding of the new rate (some notes round to the nearest eighth of a point) and the timing of when the index is read are not modeled.
- It covers principal and interest only, with every payment made as scheduled and no extra principal. Tax, insurance and any mortgage insurance come on top.
Frequently asked questions
What do names like 5/1 and 7/6 mean?
The first number is the fixed period in years. The second is how often the rate adjusts after that: a 1 means once a year, a 6 means every six months. A 5/1 ARM is fixed for five years and then adjusts yearly; a 7/6 ARM is fixed for seven years and then adjusts every six months.
What does a cap structure like 2/1/5 mean?
It lists the caps in order: initial, periodic, lifetime. With 2/1/5, the rate can move up to 2 percentage points at the first adjustment, up to 1 point at each later adjustment, and never more than 5 points above the start rate. Enter the three numbers from your loan documents in the rate caps fields.
Can my payment go down when the rate adjusts?
Yes, if the index has fallen enough that the fully indexed rate is below your current rate. Your note says whether the caps also limit decreases, and many notes set a floor below which the rate cannot go. This calculator applies the caps in both directions and stops at 0%; if your note's floor is higher, use that as the lowest rate you enter.
Does the margin ever change?
No. The margin is fixed in your note at closing and stays the same for the life of the loan. Only the index moves. That is why two ARMs with the same start rate can behave very differently later: the one with the higher margin adjusts to a higher rate from the same index.
When will I know my new payment?
Federal rules generally require your servicer to send a notice several months before the first payment at the first adjusted rate, with an estimate of the new rate and payment, and to send notice ahead of later payment changes too. Those notices use the actual index value, so they replace the rate you assumed here.
Where do I find the index, margin and caps?
On the Loan Estimate, in the Adjustable Interest Rate (AIR) table, and in your promissory note. The AIR table lists the index, the margin, the first and later change limits, and the minimum and maximum rates.
Next steps: if you might refinance before the first adjustment, the refinance break-even calculator shows how long a new loan takes to pay for itself. To weigh an ARM against a fixed-rate offer over the years you expect to keep it, use the loan comparison calculator. For a fixed-rate loan with a lower rate in the early years, the temporary buydown calculator shows a different way to start with a smaller payment.