ARM Calculator.

Save Thousands By Locking In San Diego's Low Fixed Mortgage Rates Today

Most homebuyers across the United States choose fixed-rate mortgages instead of adjustable-rate loans. Fixed-rates allow them to guarantee a fixed rate of interest & fixed monthly payment for the duration of the loan's term, while protecting them from inflationary shocks that lift interest rates. If interest rates fall homebuyers with a fixed-rate loan can still refinance at a lower rate. ARMs are more popular when interest rates are high and/or rising, whereas fixed rate dominate the market when interest rates are low and not rising.

We publish current San Diego mortgage rates in an interactive table which allows you to compare and contrast monthly payments and interest rates for fixed & ARM loan options.


Adjustable Rate Mortgage Calculator

Usage Instructions

  • Enter your loan details & click on the calculate payment button.
  • If you are only interested in the principal & interest component of the home loan payment, enter zero in the PMI, insurance, property tax & HOA fields.
  • If you would like to create a printable amortization schedule click on the button at the bottom of the calculator.

This calculator estimates the monthly principal & interest payments on an adjustable rate mortgage. It also enables borrowers to create printable amortization schedules which will show how their loan payment may change over time given their estimated adjustment cycle. The calculator in the second tab allows users to estimate the effective APR on an ARM loan.

Downpayment & Home Price Amount
Home price:
Down payment:
Mortgage amount:
Loan Structure Amount
Loan term:
Beginning interest rate (APR %):
Interest rate cap (%):
PMI (%):
Initial Rate Adjustment Amount
Years before first rate adjustment:
Expected initial adjustment (%):
Subsequent Adjustments Amount
Months between further adjustments:
Expected additional adjustments (%):
Other Homeownership Costs Amount
Annual insurance ($):
Annual property taxes ($):
Monthly HOA fees ($):
Initial Monthly Payments Amount
Beginning monthly principal and interest payment:
Monthly fees & insurance:
Initial payment w fees:
Maximum Monthly Payments Amount
Maximum monthly P&I payment:
Maximum payment w fees:
Loan Totals Amount
Total monthly P&I payments:
Total interest:
Downpayment & Home Price Amount
Home price:
Down payment:
Loan amount:
Loan Structure Amount
Mortgage loan term:
Introductory interest rate (%):
Referenced Index Rate (%):
Margin (%):
Initial Adjustment Amount
Months before first rate adjustment:
Expected initial adjustments (%):
Subsequent Adjustments Amount
Months between subsequent adjustments:
Expected subsequent adjustments (%):
Closing Costs Amount
Discount points (%):
Origination points (%):
Other fees to include:
Initial Payments Amount
Total closing costs:
Beginning monthly principal and interest payment:
Fully indexed P&I payment:
Loan Totals Amount
Total monthly payments:
Total interest:
Adjustable rate mortgage APR:

Save Thousands By Locking In San Diego's Low Fixed Mortgage Rates Today

Most homebuyers across the United States choose fixed-rate mortgages instead of adjustable-rate loans. Fixed-rates allow them to guarantee a fixed rate of interest & fixed monthly payment for the duration of the loan's term, while protecting them from inflationary shocks that lift interest rates. If interest rates fall homebuyers with a fixed-rate loan can still refinance at a lower rate. ARMs are more popular when interest rates are high and/or rising, whereas fixed rate dominate the market when interest rates are low and not rising.

We publish current San Diego mortgage rates in an interactive table which allows you to compare and contrast monthly payments and interest rates for fixed & ARM loan options.


Current San Diego 30-YR Mortgage Rates

The following table highlights current San Diego mortgage rates. By default 30-year purchase loans are displayed. Clicking on the refinance button switches loans to refinance. Other loan adjustment options including price, down payment, home location, credit score, term & fixed-rate options are available for selection in the filters area at the top of the table.

{literal} {/literal}

An Introductory Guide to Adjustable-rate Mortgages (ARM)

Homeownership is a costly investment that entails ample financial planning. Besides having a good credit score, building your income, and saving down payment, it’s crucial to understand how your loan’s payment structure can impact the overall cost of your mortgage.

In the U.S., most homebuyers typically choose a 30-year fixed-rate mortgage. This is the most popular choice because it ensures the same principal and interest payments throughout the entire loan. It’s the safe option for homebuyers, particularly those looking to settle long-term in a house. On the other hand, borrowers also have the option to take adjustable-rate mortgages (ARM). ARMs come with payments that change periodically based on market rates. Despite the risk of increasing payments, some homebuyers take ARMs especially if they plan to move to another home within a couple of years.

Our article will explain how ARMs work and their differences from fixed-rate loans. We’ll talk about common types of ARM terms and key factors that determine ARM payments. These include factors such as the index, margin, and rate caps. We’ll also discuss the benefits and drawbacks of taking ARMs, as well as when to consider this type of mortgage. By understanding ARMs, you can take advantage of this loan option to bolster your savings.

A Brief History of U.S. Mortgages

Houses on the US.

Prior to the Great Depression from 1929 to 1933, most home loans in the U.S. had adjustable rates and were structured with a 5-year balloon payment. Mortgages also typically came with 11 or 12-year amortizing loans, which were way shorter than today’s standard 30-year term. Most homebuyers used a type of hybrid mortgage that financed 50% of the home’s price with an interest-only balloon loan. This is later refinanced into a longer amortizing loan to pay off the remaining balance.

Because the balloon loan required a large payment at the end of the term, it forced borrowers to keep refinancing their mortgage when they could not afford the payment. This old payment structure was based on the premise that borrowers would always have enough credit to repay their debt. In the early 1920s, lenders and borrowers alike believed asset prices would keep increasing together with their income. But by 1933, between 40% to 50% of U.S. residents defaulted on their mortgage. Unfortunately, this financing system left homeowners at greater risk of missing payments, eventually causing widespread foreclosures.

Paving the Way for More Affordable Housing

As homeowners defaulted, it led to lowering home prices and tightening of credit standards. In response, the U.S. federal government became heavily involved in the home financing market. Congress passed the National Housing Act of 1934, establishing the Federal Housing Administration (FHA) to improve capital flows throughout the housing market. The FHA would eventually prescribe rules for home loan payment terms and interest rates. They would also replace balloon payments with a fully amortizing loan structure.

In 1938, Congress created the Federal National Mortgage Association, known as Fannie Mae today, which made it easier for lenders to secure capital to back mortgages. And to help mortgage lenders obtain better loan prices on the capital markets, the Government National Mortgage Association, also known as Ginnie Mae, was founded in 1968. By 1970, the Federal Home Loan Mortgage Corporation, known as Freddie Mac, was also created to expand the secondary market for home loans, further stimulating liquidity in mortgage markets.

The Persistence of 30-Year Fixed Mortgages

At present, most homebuyers take fixed-rate mortgages. Government programs have also made the 30-year fixed-rate mortgage more accessible with affordable rates. Because of this, the 30-year fixed-rate mortgage is actually unique to the United States. In other countries, such as the United Kingdom and Canada, a person can only obtain a variable or adjustable-rate mortgage to purchase a home.

Borrowers who obtain a fixed-rate loan have the opportunity to refinance to a lower rate if market rates fall. Meanwhile, if rates rise, their current interest rate remains locked in. This guarantees affordable monthly mortgage payments that do not increase throughout the payment term.


How Common are Adjustable-rate Mortgages?

ARMs only take up a small percentage of the U.S. housing market, while fixed-rate loans are the dominant mortgage product. In October 2020, 30-year fixed-rate mortgages accounted for 74.2% of all new loans, based on the Urban Institute December 2020 Housing Finance at a Glance. This is trailed by 15-year fixed mortgages, which made up 16.9% of new loans. Meanwhile, ARMs only took a small portion of the housing market. As of October 2020, adjustable-rate mortgages (ARM) only accounted for 0.9% of new mortgage originations.

Due to the COVID-19 pandemic, mortgage rates fell to historic lows in 2020. Before this crisis, the average 30-year fixed mortgage rate has never dropped below 3.3%. But as markets declined and unemployment increased, the Federal Reserve made efforts to keep mortgage rates near zero. This helped stimulate market activity and boosted mortgage refinancing in 2020.

As a result, the record low rates caused fewer people to take ARMs. According to the Mortgage Bankers Association, applications for ARMs declined by around 50% in March 2020. As rates dropped, more consumers were obliged to take fixed-rate mortgages.

In a normal economic climate, ARMs typically have lower initial rates than fixed-rate loans. When this is the case, homebuyers can take advantage of the ARM’s low introductory rate to obtain affordable mortgage payments. This is guaranteed at least during the first few years of the loan. Before the initial period ends, you can refinance your ARM into a fixed-rate term to lock in a low rate. For those who intend to move, you can try to sell your home before the rate adjusts. Depending on your plans, both steps will help you avoid higher monthly payments once your rate increases.

Notes on Mortgage Refinancing

Borrowers who want to obtain a better rate and term can refinance their mortgage. Refinancing allows you to replace your current loan with a new one. This lets you secure a lower rate to boost your savings. More homeowners tend to refinance when market rates are generally low.

However, refinancing does not come cheap. The closing costs for refinancing can take up 3% to 6% of your loan amount. With a $250,000 principal loan balance, your closing costs can range between $7,500 to $15,000. You must also have a credit score of at least 620 to qualify for refinancing. To obtain a lower rate, it’s best to have a credit score of 700 and above. To justify the expensive cost, borrowers should refinance at least 1 to 2 points lower than their current rate.


Comparing Fixed-Rate Mortgages and ARMS

Couple comparing mortgage deals.

The following section will explain specific differences between fixed-rate mortgages and adjustable-rate loans.

The Fundamentals of Fixed-rate Loans

Fixed-rate mortgages (FRM) are commonly taken as 30-year and 15-year terms, though 10-year and 20-year terms are also available. Since they come with a locked interest rate, it has predictable monthly payments. This makes it more convenient to plan your budget and prepare funds. You don’t have to deal with sudden payment increases that you can’t afford.

For example, let’s say you took a 30-year FRM with a loan amount of $350,000 at 3.2% APR. This results in a monthly principal and interest payment (P&I) of $1,514. With a fixed-rate loan, you’ll be charged the same APR and P&I for the entire mortgage duration. Borrowers with fixed-rate mortgages also have the option to refinance if they want to secure a lower fixed rate.

FRMs follow a regular amortization schedule that shows the exact number of payments you need to make throughout the term. A 30-year FRM comes with 360 payments paid across 30 years, while a 15-year FRM requires 180 payments spread throughout 15 years. If you make payments as scheduled, it guarantees your loan will be paid within the given term.

Moreover, shorter fixed-rate terms usually come with lower interest rates than longer terms. A 15-year fixed mortgage rate is typically lower by 0.25% to 1% than a 30-year fixed mortgage. Note that higher rates and longer terms result in higher interest charges over the life of the loan.

The following chart shows the average rates for fixed-rate mortgages as of January 25, 2021:

Fixed-rate MortgageInterest Rate (APR)

Borrowers Who Choose Fixed-rate Loans

Fixed-rate mortgages are a good choice for homebuyers who want stable and predictable mortgage payments. If you want the security of locked rates, get this type of loan. It’s also most suitable for people who want to purchase a long-term home. But as a trade-off, fixed-rate mortgages come with stringent qualifying standards compared to ARMs. Thus, it’s a great option for people with good credit score, reliable income, and clean credit history. To qualify for a conventional mortgage, most lenders favor a credit score of 680 and above.


Understanding Adjustable-rate Mortgages

Adjustable-rate mortgages (ARM) have interest rates that change periodically. It comes with a 30-year term which is usually taken as a hybrid ARM, such as 3/1, 5/1, 7/1, and 10/1 ARM terms. Borrowers also have the option to take straight adjustable-rate loans, where the interest rate typically changes annually right after the first year. Since the interest rate adjusts based on current market rates, it cannot follow a regular amortization schedule. Once the new rate is assigned, that’s the only time you can determine the exact payment.

Hybrid ARMs typically start with a low initial rate during the introductory period. After this initial period, the rate is subject to change based on current market conditions. For example, with a 5/1 ARM, your mortgage will have a fixed rate for the first 5 years. Once this initial period is done, your rate is scheduled to adjust once every year for the remaining term. If the rate rises, expect your monthly payments to increase. Thus, you should budget enough funds to anticipate higher payments. But if the rate falls, you also benefit from lower monthly payments. The most popular type of hybrid adjustable mortgage is the 5/1 ARM.

In contrast, straight adjustable-rate loans do not have an introductory period. They adjust periodically at regular fixed intervals. Before hybrid ARMs became popular, more borrowers used to take the one-year ARM. This type of loan has an interest rate that changes once a year for 30 years. Borrowers also have the option to take ARMs that adjust every 6 months or 3 years. Five-year straight ARMs were also available, but these are now rarely offered by lenders.

Today, hybrid ARMs are more popular because it allows you to start with a low introductory rate for the first several years. ARM rates are influenced by the prime rate, which is set by the Federal Reserve according to current market performance. The prime rate is derived from the base rate posted by at least 70% of the largest banks in the U.S.

The following chart lists rates for different hybrid ARM terms as of January 25, 2021. Though longer fixed-rate periods typically have higher rates, in this example, the 5/1 ARM has the highest rate.

Adjustable-rate MortgageInterest Rate (APR)
5/1 ARM4.00%
7/1 ARM3.890%
10/1 ARM3.940%

The low introductory rate lets borrowers make affordable monthly payments during the first few years of the loan. With more room in your budget, you can actually make extra mortgage payments to pay off your loan sooner. However, paying your mortgage early is unprofitable to lenders. To discourage this, they usually require prepayment penalty charges. Be wary of this expensive cost before deciding to make extra payments on your loan.

Prepayment Penalty

A prepayment penalty fee is charged by lenders to deter borrowers from selling, refinancing, and paying their mortgage early. This usually lasts for the first three years of the loan, which can cost around 1% to 2% of your loan amount. Speak with your lender about prepayment penalty rules before making extra payments. You can elect to make extra payments after the penalty period. Borrowers can choose to obtain a conventional loan without a prepayment penalty clause. Government-backed loans such as FHA loans, VA, loans, and USDA loans also do not require prepayment penalty charges.


Borrowers Who Choose ARMs

Adjustable-rate loans are a good option for people who plan to move after a couple of years. And for those anticipating a promotion or a general increase in income, more money will help you afford the increasing payments. ARMs are also used by professional house flippers who buy cheap property and sell them at a higher price.

Compared to fixed-rate mortgages, ARMs are actually easier to qualify for, depending on your lender. Experian notes that ARMs are a type of subprime mortgage which accepts borrowers with poor credit and limited funds. However, the low initial rates also make them appealing to borrowers with fair and stellar credit scores. Note that unless you sell your home, many ARM borrowers eventually refinance into a fixed-rate mortgage to avoid increasing monthly payments.

ARMs are a good option for those buying a starter home. You can move to a larger house after several years before the introductory period ends. They also work for people with jobs that assign them to different locations every few years. Again, make sure to sell the house before higher payments kick in. If you can’t, be ready to make more expensive payments when the rate increases.


ARMs are a viable choice among borrowers with jumbo mortgages or non-conforming conventional loans. Jumbo mortgages exceed the conforming limit qualified under Fannie Mae and Freddie Mac. For example, let’s suppose the maximum conforming limit for one-unit residences in your area is $647,200. Any loan beyond this limit is secured by lenders as a jumbo loan. It cannot be bought or secured by Fannie Mae or Freddie Mac. Since these loans are used to purchase more expensive property, the low initial rate helps borrowers obtain more affordable monthly payments during the first years of the mortgages.

To distinguish the differences between fixed-rate loans and ARMs, we came up with the chart below.

Loan DetailsARMFixed-Rate Mortgage
Type of BorrowerPeople who plan to move after a few years
People who need a lower initial monthly payment to reach DTI requirements and refinance in the future
People who believe rates are likely to decrease
People who have high income and can handle market volatility
House flippers who buy, renovate, & sell homes
People who prioritize stable & predictable monthly payments
Can afford fully amortizing loans at market rates
People with good credit scores and ample income
People who think rates will likely increase
People who want to settle long-term in a home
People who are not investing in other high yield assets who can focus on making mortgage payments
BenefitsTypically comes with a low initial rate than fixed-rate loans during stable economic climate
The low introductory rate lets borrowers pay affordable monthly payments during the first few years of the loan
Payments remain affordable even if market rates shift
No need to worry about sudden increase in payments
Borrowers can immediately build significant equity
DrawbacksMonthly payments can adjust greatly after the introductory period
Borrowers risk having unaffordable payments if they do not have enough funds
Charges a higher interest rate for stable payments
Harder to qualify for compared to ARMs
RefinancingWhile it locks your interest rate, you still have the option to refinance to a better rate and term
Refinancing too early may come with prepayment penalty charges
When the introductory period ends:
You can refinance into a fixed-rate loan or ARM
Some loans with market-low introductory rates may have prepayment penalty charges

Key Factors that Impact ARM Payments

ARM payments cannot be easily calculated like fixed-rate loans. They have complex components that determine your monthly payments when rates change. Before you take an ARM, you should understand the following factors that affect ARM payments:


The benchmark interest rate which indicates general market conditions is called the index. To estimate interest rate changes, lenders add the referenced index rate along with your loan’s margin: Index + Margin = Rate. There are different indexes used for reference, which is chosen primarily by your lender. Once this is set, borrowers can no longer ask the lender to change it after closing.

The following are different indexes used by ARM lenders to determine rates:

  • London Interbank Offered Rate (LIBOR)
  • Secured Overnight Financing Rate (SOFR)
  • Constant Maturity Treasury (CMT or TCM)
  • 11th District Cost of Funds Index (COFI)
  • Certificate of Deposit Index (CODI)
  • 12-Month Treasury Average (MTA or MAT)
  • Bank Prime Loan (Prime Rate)
  • Cost of Savings Index (COSI)
  • Treasury Bill (T-Bill)

Notes on Index Usage

When interest rates are falling, leading indexes such as CMT are more beneficial for ARM borrowers. But when rates are rising, it’s more favorable to choose a lagging index such as COFI.

Moreover, while LIBOR is a benchmark rate used by many major lending institutions, it won’t be around for long. According to the Consumer Financial Protection Bureau, LIBOR is scheduled to be phased out after 2021. Since LIBOR is based on transactions that no longer occur as regularly as previous years, it’s now a less reliable index. In place of LIBOR, many ARM lenders are now using the Secured Overnight Financing Rate (SOFR).



The ARM margin refers to the number of percentage points added on top of your referenced index rate after the initial period ends. This determines the fully indexed rate you must pay on your mortgage. Again, once this is set on your loan agreement, your margin can no longer be changed.

A borrower’s credit score has a significant impact on their margin. If you have a high credit score, lenders typically give you a lower ARM margin. This results in a lower total interest rate for your mortgage. Meanwhile, those with lower credit scores are given a higher margin, which makes their loan more expensive. Thus, it pays to improve your credit rating before you apply for an ARM, or any type of loan for that matter.

Rate Adjustment Frequency

The rate adjustment frequency indicates the interval at which your rate resets or change. ARM rates typically adjust once a year after the introductory period. But if you take a straight adjustable-rate mortgage, your rate may reset every 6 months, or once a year right after the first year. Your lender adds the margin to the index value to estimate your new rate on your reset due date.

In general, a longer period between rate adjustments is more beneficial for borrowers. This gives borrowers time to settle and even find ways to earn more income. It is also the reason why hybrid ARMs with fixed-rate introductory periods are popular among ARM borrowers.

Rate Caps

Though ARMs change based on prevailing market rates, there is a threshold to how high rates can increase. This is kept in check by rate caps, which limit rate increases over the life of the loan. For example, two different lenders may begin with the same introductory rate. However, one has a higher rate cap than the other. The higher rate cap results in a higher interest rate, making your mortgage payments more expensive. Thus, obtaining a lower rate cap will help you attain more affordable mortgage payments.

ARM borrowers should know their rate cap in order to determine how much extra money they need for ARM payments. You should also ask your lender about the maximum payment needed based on your rate cap.

Three Main Types of Rate Cap

Initial Adjustment Cap: Limits how much your rate can rise the first time it adjusts. This cap takes effect once the introductory period ends. An initial adjustment cap is typically 2% to 5% higher than the introductory rate.

Subsequent Adjustment Cap: This cap limits how high your rate can increase in the succeeding adjustment periods. The subsequent adjustment cap is typically around 2% higher than the introductory rate.

Lifetime Adjustment Cap: Indicates the maximum interest rate increase allowable on your ARM. This limits how high your rate can rise throughout the entire mortgage duration. The lifetime adjustment cap is usually 5% higher than the introductory rate. But note that other lenders may require a much higher lifetime cap.


Drawbacks to Consider

Young couple shocked with monthly bills.

If you find a low initial rate on an ARM, this lets you make affordable monthly payments during first couple of years. But before you take this loan option, consider the disadvantages. The changing rates make ARMs unappealing because payments are hard to predict. You risk making much higher payments when market rates increase throughout the years.

Even with rate caps, your payments may become unaffordable, especially during emergency situations. This can heavily strain your finances, which puts you at risk of default. If your budget is too tight with little financial cushion, it’s perhaps wiser to avoid ARMs. If you plan to refinance into a fixed-rate loan, be sure to do so before your payment increases. When rates significantly rise, many ARM borrowers eventually refinance into a fixed-rate mortgage.

Moreover, loans with changing rates may result in negative amortization. Some adjustable-rate mortgages allow borrowers to determine how much of the interest portion they can pay each month. Negative amortization happens when your monthly payments are unable to cover interest charges on your loan. This increases your principal loan amount rather than gradually reduce it. Over time, you’ll owe more on your mortgage than the value of your home. If you have trouble paying back your lender, you risk losing your home to foreclosure.

The chart below summarizes the benefits and drawbacks of taking an ARM:

May have a lower introductory rate compared to a fixed-rate loan.Rate changes and is unpredictable.
The low introductory rate allows you to make affordable payments during the first few years.The rate may increase when the introductory period ends, resulting in higher payments.
Easier to qualify for compared to fixed-rate loans. Open to borrowers with limited or poor credit.The increasing rate may render your payments unaffordable. Puts your home at risk of foreclosure.
The low initial rate lets you qualify for a bigger loan amount.You may encounter negative amortization. Failing to cover interest increases your loan amount.
You can make low monthly payments if rates adjust lower.More difficult to plan your budget compared to fixed-rate loans.

Before choosing an adjustable-rate mortgage, ask yourself the following questions. If you answer yes to some or most of these questions, taking an ARM might be beneficial for you. These scenarios suggest it’s not ideal to keep a 30-year fixed-rate mortgage. Depending on your priorities, you might need a larger home, relocate to another area, or eventually refinance your mortgage.

  • Am I young, single, and looking for an apartment?
  • Am I purchasing a starter house?
  • Do I plan to have a bigger family?
  • Do I intend to move or extend my home in 7 years?
  • Do I have trouble qualifying for a fixed mortgage at market rates?
  • Has my job made me move more than once in 10 years?
  • Do I plan to retire in the next 10 years?
  • Am I getting a jumbo mortgage?

When should you consider renting? If you do not plan on living in a home for at least 5 to 7 years, it is typically better to rent versus buy property. Unless you’re able to find a good deal that fits your budget, renting is a more practical solution. Once you’ve saved enough in a couple of years, you can move forward with your home ownership plans.

If your monthly rent matches or exceeds the cost of mortgage payments, you might want to consider buying a house in the near future. If you’re planning on staying in a particular area for a long time, buying a house would be a worthwhile investment. However, if you do not intend to stay long-term, it’s better to move to an area with more affordable rent. The cheaper rent will help you build savings, especially if your planning to buy a home in the future.

Determining ARM Payments

You can use the above calculator to estimate monthly payments on an adjustable-rate mortgage (ARM). Since ARMs factor in many different variables, using the calculator will make it easier to determine initial monthly mortgage payments, as well maximum monthly payments on your loan. To see this at work, let’s review the example below.

Let’s presume your house is valued at $320,000 and you took a 5/1 ARM. To eliminate private mortgage insurance, you made a 20% down payment worth $64,000. The introductory rate is 3.2% APR, with an expected initial adjustment rate of 2%, and a subsequent adjustment rate of 0.25%. Your lifetime adjustment cap is 8%. See the results below.

1st Example, 5/1 ARM

Home Price: $320,000
Down Payment: $64,000
Loan Amount: $256,000
Loan term: 30 years
Years Before Rate Adjustment: 5
Introductory Rate: 3.2%
Lifetime Rate Cap: 8%
Expected Initial Adjustment Cap: 2%
Subsequent Adjustment Cap: 0.25%
Annual Insurance: $1,000
Annual property taxes: $2,500
Monthly HOA fees: $300

Loan DetailsAmount
Beginning monthly principal & interest payment$1,107.12
Monthly fees & insurance$711.67
Introductory payment with fees$1,826.78
Maximum monthly principal & interest payment$1,854.48
Maximum monthly payment with fees$2,446.15
Total Interest Costs$310,860.70

In this example, your initial principal and interest payment for the first five years will be $1,107.12. When your rate adjusts and your payment increases, your maximum principal and interest payment can increase up to $1,854.48. Thus, to make sure you can afford monthly payments, you must prepare an extra $747.36 each month for the remaining term. Your ARM will cost a total of $310,860.70 in interest charges.

For the next example, given every variable remains the same, let’s suppose your rate caps are higher. Your lifetime rate cap is 10%, with an expected initial adjustment at 3%, and a subsequent adjustment cap at 0.50%. Let’s review the results below.

2nd Example, 5/1 ARM

Home Price: $320,000
Down Payment: $64,000
Loan Amount: $256,000
Loan term: 30 years
Years Before Rate Adjustment: 5
Introductory Rate: 3.2%
Lifetime Rate Cap: 10%
Expected Initial Adjustment Cap: 3%
Subsequent Adjustment Cap: 0.50%
Annual Insurance: $1,000
Annual property taxes: $2,500
Monthly HOA fees: $300

Loan DetailsAmount
Beginning monthly principal & interest payment$1,107.12
Monthly fees & insurance$719.67
Introductory payment with fees$1,826.78
Maximum monthly principal & interest payment$2,003.77
Maximum monthly payment with fees$2,595.44
Total Interest Costs$385,908.91

In the second example, your beginning monthly principal and interest payment will be $1,107.12, just like the first example. Because you start off with the same introductory rate, expect to have the same payments during the first 5 years of the mortgage. However, since your rate caps are higher, your maximum principal and interest payment will be $2,003.77. This is higher by $149.29 than the first example. To make sure you can cover increasing payments, you must set aside $896.65 per month.

Lastly, the second example yielded a total of $385,908.91 in interest charges. This is $75,048 more expensive than the first example. If you choose the first example, you’ll save more on interest costs compared to the second example with higher rate caps.

Reviewing the first and second examples show that obtaining higher rate caps result in more expensive ARM payments. To maximize your savings, make sure to shop for lenders and compare rate caps. It’s also important to have a high credit score to obtain a more competitive rate. Securing a lower rate cap will keep your mortgage payments within an affordable range.

In Summary

Family moving into new house.

Though most homebuyers take fixed-rate loans, it’s equally important to understand how adjustable-rate mortgages (ARM) can work for you. Popular ARMs are hybrid adjustable-rate mortgages, which come with a fixed introductory period. These are typically 5/1, 7/1, and 10/1 ARMs. After the introductory period, the rate is scheduled to adjust once every year for the remaining term.

In a normal economy, ARMs typically have a lower introductory rate than fixed-rate mortgages. The lower rate makes payments more affordable, at least during the first few years of the mortgage. But once the rate adjusts, the borrower must be ready for higher payments if the rate resets higher. To steer clear of higher payments, many ARM borrowers eventually refinance into a fixed-rate mortgage or sell their property.

ARMs are suitable for borrowers who don’t plan to stay longer than 5 or 7 years in a home. The low introductory payment can help them save on interest costs. This is a good deal, instead of making more expensive monthly payments on a 30-year fixed mortgage. With an ARM, you can refinance your loan or sell your house just in time before the rate increases.  

If you have a job that requires you to move now and then, consider this loan option. And if you’re planning to move to a bigger house, you can take an ARM with a low initial rate. Borrowers who have difficulty qualifying for a fixed-rate mortgage may also find it easier to qualify for an adjustable-rate loan.

On the downside, you must be ready for higher payments once rates reset higher. It can make your payments unaffordable, so be aware of the risks. Since mortgage rates eventually increase over time, many ARM borrowers tend to refinance into a fixed-rate mortgage. This helps them lock in a low rate to boost interest savings.

San Diego Borrowers: Are You Unsure Which Loans You'll Qualify For?

We have partnered with Mortgage Research Center to help San Diego homebuyers and refinancers find out what loan programs they are qualified for and connect them with San Diego lenders offering competitive interest rates.