This calculator helps home buyers compare the monthly payments on fixed-rate home loans, interest-only (IO) payments & fully amortizing adjustable-rate mortgages.
In addition to estimating monthly principal & interest payments this calculator also helps buyers estimate the other monthly fees associated with home ownership including property taxes, insurance, along with any association dues. After calculating results users can also create side-by-side printer-friendly amortization schedules.
ARM vs Fixed Rate Mortgage Calculator
Current 30 YR Fixed Mortgage Rates
The following table highlights locally available current 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 & ARM options are available for selection in the filters area at the top of the table.
Comparing Fixed vs Adjustable Rate Home Loans
To understand all your options for mortgage financing, looking at the defining properties of different loan types can help you make a better decision. Perhaps the most common loans to compare and contrast for each situation are fixed rate loans and adjustable rate loans (ARM). Knowing more about how each works for you will guide you to your best decisions.
Fixed Rate Mortgages (FRM)
As the name implies, fixed-rate mortgages have a fixed annual percentage rate (APR) for the life of the loan. Because they are simple, they can be referred to as the “vanilla wafer” of mortgages. In an FRM, every payment from the first to the last is the same. It is a set, or fixed rate.
Essentially, there are four main factors that will determine the details of a fixed-rate loan:
- The amount being financed
- The time it will be financed
- The compounding frequency
- The interest rate
A fixed-rate loan is meant as a long-term investment. The interest rate will therefore be higher for an FRM than in shorter term loans to compensate for the lender’s risks over time. This higher rate does not translate as being an unwise move in every case by any means.
An FRM makes more sense if a homeowner intends to keep their home for the duration of the loan. The buyer wants to lock down steady payments over time – typically in intervals of 10, 15, 20 or 30 years for home mortgages. Unchanging monthly payments are easy to budget around.
Whether you actually save money over time depends on how the interest rate specifically fluctuates. If it rises above the rate when you signed the mortgage, an FRM will likely save you money. If the rate falls considerably or the property loses value over time, a fixed-rate mortgage would end up costing more, overall, than other options.
While the FRM was once the accepted standard for almost all home mortgage loans, today’s buyer has many more flexible options to consider alongside the FRM.
Adjustable Rate Mortgages (ARM)
ARMs may also be called variable-rate loans/mortgages or tracker mortgages, because of the varying rate that tracks on published benchmark index rates.
In most ARMs, the borrower will receive a fixed, discounted APR for a set time period, after which the APR adjusts on set intervals, using a fixed margin over a benchmark index rate.
ARMS are usually listed with 2 numbers to describe them: the length of the fixed rate first, and then the annual frequency the interest rate is recalculated. So a 10/1 ARM would see a fixed, reduced interest rate for an initial 10 year term, after which, the interest rate would be recalculated once a year. A 5/2 ARM would see a discounted rate for five years, then the interest would be recalculated every other year.
The main characteristics defining an ARM include:
- The amount being financed
- The time it will be financed
- The time of a fixed APR
- The reduced introductory APR
- The annual frequency of interest rate adjustments
- The margin used after the fixed APR period
- The specific benchmark index that will be used to set rates
Arriving at the amounts and time periods are pretty self-evident. The amount will be the price of the home and other closing costs, the time will be referencing the full amortization of the loan.
Knowing more about how your variable rate is derived and calculated in an ARM helps you see if this is the best lending product to consider.
Setting a Variable Rate
The way a variable rate is calculated is using a margin, or a fixed percentage. Margins might be in any incremental value – such as 1.25%, .375%, 2.41% and so on. Each lender could potentially offer you a different margin and most of them will do so, strategically.
The margin is applied, or added to a benchmark index rate and results in the adjusted APR, or fully indexed rate. An indexed rate is usually the lowest rate a lender can offer – the fully indexed rate will include the full margin added to the benchmark rate.
Index + Margin = Your Interest RateFor example, let’s say you had a 5/1 ARM on a 20-year mortgage. It has an introductory rate of 4%, and then a margin of +1.45% to the benchmark index rate, calculated once a year.
- Following the introductory period of the reduced 4% for 5 years ($1211.96/monthly), in the sixth year, the APR would adjust to have 1.45% added to the baseline rate it is indexed to on the day it is calculated.
- If the baseline rate was 5%, the fully indexed rate in year six and the rate charged to the borrower would be 6.5% ($1491.15/monthly).
- In the seventh year, the fully indexed rate is again recalculated based on the same math, and the baseline rate is now 4.55% - resulting in a fully indexed rate of 6% for year seven ($1432.86/monthly).
- The fully indexed rate in the example would be recalculated again every year until the loan reaches maturity. You can see how the change of a few percentage points can add considerably to the monthly amounts paid by the borrower...and it can also drop a payment. This unpredictability is a risk of an ARM
- If the rate is stable or goes down, it can save the borrower money compared to an FRM over time. If the rate goes too high, the savings from the discounted introductory rate can quickly be lost by higher interest payments later in the loan.
Though the margin will not usually change in an ARM, the benchmark index rate certainly can, and will, and sometimes a lot. The margin is still an important calculation, because it will vary between lenders and this number alone can determine the true value of your deal. A margin will generally stay fixed for a loan's lifetime, and lower, is going to be better for the buyer.
But the variable nature of an ARM typically comes not from changes or flexes in the margin, but from fluctuations in the benchmark index over time.
Benchmark Index Rates
In global credit markets, interest rates fluctuate daily. While there may be a movement of only a fraction of a percentage point, the ripple effect it can have is enormous because many lending institutions – and the loans they carry – are tied directly to these amounts.
The term benchmark describes indexes adopted and approved by multiple loan providers as a standard. A benchmark index will have millions of dollars in ancillary products built off its stability and dependability…but it will fluctuate based on shifts in the buying public and market conditions.
A borrower cannot do much about the effects of a specific benchmark, but they can arm themselves with knowledge. It can help to know which ones are commonly used in mortgage deals, how they compute their baseline, and how they will all compute into the final APR:
- LIBOR: The London Inter-Bank Offered Rate (or ICE LIBOR, for Intercontinental Exchange LIBOR) is currently the primary benchmark for short-term interest rates around the world. This rate is based on the average interest a collection of London-based banks would charge to other banks for a loan. It is published daily, and drives billions of dollars in global derivatives that rely on it to set their own variable rates. LIBOR rates are calculated daily for seven borrowing periods ranging from overnight to one year and are currently applicable in five worldwide currencies. LIBOR rates are sometimes estimated rather than being calculated from the data of transactional histories.
- SOFR: A recent addition to the pool of benchmarked reference rates (April, 2018), SOFR, or Secured Overnight Financing Rate, is a US-based answer to dependence on LIBOR. SOFR is based on the average amount of interest charged by New York banks for cash borrowed overnight, secured by Treasury Securities. Because SOFR is based on actual transactional activity being measured daily and not using estimates as LIBOR does, it is felt to be more transparent and perhaps more secure from manipulation. While most US short-term mortgages to-date will not yet have used SOFR as the benchmark, they certainly will likely be aimed this way in the future. Results are published daily.
- COFI: COFI stands for the 11th District Monthly Weighted Average Cost of Funds Index, which reflects the interest rate offered by average on checking and savings accounts for qualified accounts in California, Nevada and Arizona. The results are calculated monthly, and each published result is for the previous month’s totals.
- CMT: The Constant Maturity Treasury index is based on yields from a range of Treasury securities adjusted to a constant maturity, like one or five years. Because the nature of this index is considered a risk-free security, lenders using this index will typically add a percentage to cover their own risks; so, a CMT rate of 4% might be presented to the buyer as 5% with the lender’s mark-up. Buyer beware, but this is another legitimate index often used for deciding the variable rate for many short-term loans.
How Benchmark Rates Directly Affect an ARM
If a lender’s margin is fixed as is typical in a mortgage, the factor changing the amount a borrower pays every year is the benchmark rate fixed to the loan. And while benchmark levels may flex daily, how often these changes are applied to change the APR is what really matters to a borrower.
For example, the LIBOR rate changes daily but a loan using that rate may only adjust itself annually, or bi-annually. The COFI rate adjusts only monthly. An ARM loan adjusted using a COFI baseline does not look at the daily history of the rate changes any more than a LIBOR-based loan would – it simply applies its adjusted rate as recorded at a specific date and time.
So the LIBOR rate could have shifted dramatically every day, while the COFI stayed steady week over week – but if they end up at the same rate on the day it is recalculated, the borrower will still pay the same rate until it is once again, recalculated.
What a borrower might consider, is the stability or volatility of a given benchmark rate over time. While it is not a guarantee of performance for the index as applied to their own loan, it can illustrate likely scenarios that will tend to occur over time.
Putting it All Together
ARM loans are offered under a name like “Conf ARM LIBOR 10/1 IO 3-2-5.”
This loan has the following features:
- is conforming
- uses an adjustable-rate
- uses LIBOR as the benchmark
- is fixed for the first 10 years
- resets annually after the initial introductory period
- charges interest-only rates during the introductory period & amortizes over the remaining 20 year term
- the rate can adjust no more than 3% during the initial rate adjustment
- in subsequent years the rate can adjust up or down a maximum of 2%
- during the lifetime of the loan the rate can increase no more than 5% over the initial rate
Which Is Better, ARM or FRM?
To determine which loan is going to make your best fit, you will need to consider your short-term situation and long-term goals. You need to consider your cash flow – both today and projected for the lifespan of the loan.
When you are thinking of a shorter-term solution, an ARM makes sense. It will offer you a reduced initial rate that a FRM will not be able to touch. You will have options to consider in how it is structured to best match your life’s trajectory.
An ARM makes a great option for someone thinking about selling within a 5-10 year period. Empty nesters or house flippers can take advantage of the lower introductory rates offered for 5 or 10 years. They can build credit and value and savings during the introductory period and sell before the rate increases. ARMs may also make more sense for younger buyers (under 55), who will have a tendency to move again within 10 years due to changes in employment or their family size. ARMs make good refinancing vehicles for people in transitional phases of life.
If a shorter stay in the home is possible or likely, looking into the benefits of an ARM’s reduced rates could save you thousands.
An FRM makes sense when a market is somewhat unpredictable, but your life plan is not. The steady, dependable rate that stays with you year-over-year creates security. If you have found the home to stay with, an FRM is definitely worth consideration. You will pay a little more than the current lowest APR, but in time, your rate may prove to be much lower than the prime rate if interest rates continue rising.
Fixed-rate mortgages allow homeowners to lock in a rate for the duration of the loan even if market rates move higher. This is effectively a one-way bet, because homeowners can refinance either FRMs or ARMs if or when rates fall.
Most home loans across the United States are structured as fixed-rate loans, as buyers value the certainty the loan format offers.
Data from recent census results also suggest that increasing numbers of US citizens are moving less today than they did in the past. While you may think you are going to move soon, life may have different plans in store for you, making a stable and dependable mortgage payment even more attractive.
When interest rates shoot up many buyers shift preference away from fixed-rates to ARMs. If buyers believe rates are likely to head lower it can make more sense to choose an ARM loan which can later be refinanced into a fixed-rate loan when rates drop.
Risks With Each
If a shorter stay in the home is likely, looking into the benefits of an ARM’s reduced initial rates could save you thousands. If you plan to stay in for the long haul, an FRM could be the way you save those thousands. The loans are somewhat rote and mechanical in nature and dictated by regulation and covenants, but what changes within them and makes each unique, are the details driven by your own specifics.
There are risks found in either direction, as well as benefits to be had by smart decision-making. The deciding factors governing your decisions should include how much money is available for negotiating and most importantly, how long you plan to stay in the home.
- ARM Risks: The big risk of choosing an ARM loan is buying a home you stay in for an extended period of time where rates reset so high they drive monthly payments above the homeowner's budget, driving them into foreclosure. When rates rise it also typically leads to lending standards tightening, which can make said loan hard to refinance.
- FRM Risks: The big risk of choosing a FRM loan is buying a home you end up selling quickly where you needlessly paid a higher rate of interest than you would have if you chose an ARM loan.