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.
Adjustable Rate Mortgage Calculator
- Enter your loan details & click on the calculate payment button.
- If you would like to create a printable amortization schedule click on the button at the bottom of the calculator.
- 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.
- This calculator does not include some miscellaneous homeownership related expenses like property maintenance.
Current Mortgage Rates
The following table highlights locally available current mortgage rates.
An Introductory Guide to Adjustable Rate Mortgages
Vanilla Fixed-rate Mortgages
Fixed-rate loans have rates which are fixed for the duration of the loan. This means the interest rate which is charged on the loan and the monthly principal & interest payments do not change throughout the duration of the loan. If a fixed loan is quoted at 5.42% and that leads to a monthly payment of $1,200, then that same rate and payment will be charged for the duration of the loan.
The vast majority of home buyers in the United States choose fixed rates for the certainty they provide.
How Fixed-rate Home Loans Came About
In most countries a person can only obtain a variable or adjustable-rate loan to purchase homes. The 30-year fixed-rate mortgage is unique to the United States.
Prior to the Great Depression most home loans across the United States had variable or adjustable rates & were structured as balloon loans where a large payment was due at the end of the loan, which forced borrowers to then have to refinance at then prevailing rates. If a homebuyer could not roll over the loan, they would go into default and get foreclosed upon. In the wake of the Great Depression many homeowners lost their homes.
As homeowners defaulted it led to lowering home prices and further tightening credit standards. This problem caused the United States federal government to become heavily involved in the home financing market. Congress passed the National Housing Act of 1934, establishing the Federal Housing Administration to improve capital flows throughout the housing market. In 1938 Congress created the Federal National Mortgage Association (Fannie Mae) to make it easier for lenders to get capital to back mortgage loans. In 1970 the Federal Home Loan Mortgage Corporation (Freddie Mac) was also created to expand the secondary market for mortgages. The Government National Mortgage Association (Ginnie Mae) was founded in 1968 to help mortgage lenders obtain better loan prices on the capital markets.
Borrowers who obtain a fixed-rate loan have the opportunity to refinance at a lower rate if rates fall, but if rates rise their current interest rate is locked in.
These government programs made the 30-year fixed-rate home loan possible at affordable rates.
How Adjustable Rates Compare to Fixed Rates
Adjustable-rate loans change the rate of interest charged throughout the duration of the loan.
Typically they come with a fixed introductory period (typically 1, 3, 5, 7 or 10 years) where the initial rate of interest and monthly payments are locked, acting similarly to a fixed-rate mortgage during the introductory period. Then when the introductory period ends the rates reset based on the performance of a reference index rate like LIBOR at some margin.
As credit market conditions change the loan's interest rate (& thus monthly payments) periodically reset at a margin to the reference rate to reflect broader credit market conditions. Most ARM loans reset annually after the initial teaser period is over.
ARMs transfer the longer-term interest rate risk from the lender to the borrower & typically offset that by offering a slightly lower introductory rate.
The table below compares the principal & interest payments on 30-year fixed & ARM $200.000 home loans. In the example, the ARM has a 7-year introductory period & an interest rate cap of 12%. The example presumes interest rates rise 1% when the loan resets in 7 years & then rises a further 0.25% each year for the duration of the loan.
|Initial Interest Rate (APR %)||4.33%||4.11%|
|Initial Monthly Payment||$993.27||$967.56|
|Max Interest Rate||4.33%||10.61%|
|Max Monthly Payment||$993.27||$1,389.09|
|Average Monthly Interest Expense||$437.71||$641.54|
|Total Interest Expense||$157,576.77||$230,953.72|
Who Should Consider Adjustable-rate Home Loans?
While most buyers prefer fixed-rate loans, there are many scenarios where ARMs can make more sense. Some examples include:
- Buyers who are paying for a fixer upper house, or a home they intend to sell before rates reset.
- Buyers who believe interest rates are headed lower.
- People who can not qualify for the higher initial payment on a fixed-rate loan, but believe they will be able to pay off significant debts to improve their credit profile and refinance their homes before rates reset higher.
- Buyers who are likely to need to move to seek employment opportunities a significant distance from where they live.
There are also some exotic ARM loans like pick-a-payment loans which could have negative amortization & interest only ARM loans. These loans tend to be more common near market peaks, but have receded after the housing bubble burst in 2007 & 2008. Generally speaking, the more a person is leveraged into a loan the greater the odds of the loan going upside down at some point. Some states do not allow lenders to seek damages beyond foreclosing on a home. Other states are full recourse, which allow lenders to pursue borrowers who were foreclosed upon for damages.
Renting Versus Buying
Residential real estate is a fairly illiquid asset class which has high transaction costs. 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 unless you buy counter-cyclically.
In the early years of a mortgage most of the home loan payment goes toward interest, so one does not build much equity in the first few years unless real estate prices jump sharply.
For example, in the above $200,000 ARM loan, if the homebuyer put 20% down it would mean the home price was $250,000. At the end of 3 years the loan balance would be $189,193.92, with only $10,806.08 repaid on the loan.
Presuming home prices appreciate 4% per year the former $250,000 home would be valued at roughly $281,216. If selling the home cost a 6% commission then the $16,873 commission would combine with the roughly $3,500 closing costs to eat $20,373 of the $31,216 in home appreciation.