How high could my ARM payment go?
Take the Consumer Financial Protection Bureau's (CFPB) own example: $216,000 for 30 years, starting at 3% and rising up to 8%. The payment starts at $911 and can reach $1,467 by year 8, up 61%. Our math matches the published Loan Estimate figures, rounded to the dollar, and you can load this example from the presets.
| Years | Highest rate | Highest payment | Lowest rate | Lowest payment |
|---|---|---|---|---|
| 1 to 5 | 3% | $911 | 3% | $911 |
| 6 | 5% | $1,123 | 2.25% | $838 |
| 7 | 7% | $1,350 | 2.25% | $838 |
| 8 to 30 | 8% | $1,467 | 2.25% | $838 |
The handbook asks a good question: if you can't refinance at a better rate, can you afford the maximum rate and payment? The headline number above is that test.
How is an adjustable rate mortgage payment calculated at each reset?
At each reset, the new rate is the index plus the margin, limited by your caps. The payment is then worked out again on the balance you still owe, over the months you have left. A 5/1 ARM keeps its rate for five years and then changes every year. A 5/6m changes every six months.
New rate = index + margin, limited by the cap and the lifetime maximumNew payment = balance × r(1 + r)^n ÷ ((1 + r)^n − 1), with n the months leftIn the example above, $192,038 is left after 60 payments. The first change moves the rate from 3% to 5%, and over the remaining 300 months the payment becomes $1,123.
The index is a market rate that moves, and the margin is a set number the lender adds. The CFPB says that generally the rate is never lower than the margin, so even a very low index has a floor, here 2.25%. Your rate can also rise when the index doesn't move at all. In the CFPB's teaser example, a 3% start with a fully indexed rate of 4.5% goes to 4.5% when the teaser ends.
What do ARM caps like 2/2/5 mean?
In this calculator, the three numbers are the most the rate can move at the first change, at each later change, and over the life of the loan. Check how your lender writes them. The CFPB notes caps may differ between the first change and later ones. On your Loan Estimate, look for "Limits on Interest Rate Changes" and "Minimum/Maximum Interest Rate" in the Adjustable Interest Rate table.
Two loans can share a maximum rate and still take very different paths. Here's how fast a $400,000 loan could climb from 5.75% under different caps. These cap sets are examples, so use your own.
| Caps (first/later/life) | First reset | Year 7 | Highest | Highest reached in |
|---|---|---|---|---|
| 2/2/5, yearly | $2,803 | $3,294 | $3,545 | Year 8 |
| 5/2/5, yearly | $3,570 | $3,570 | $3,570 | Year 6 |
| 2/1/5, yearly | $2,803 | $3,044 | $3,532 | Year 9 |
| 5/1/5, every 6 months | $3,570 | $3,570 | $3,570 | Year 6 |
When does an ARM stop beating a fixed-rate loan?
The real test is total interest paid so far, not the payment. That's because interest paid to date equals what you've paid plus what you still owe, minus what you borrowed. In our example, the worst case stays ahead of the 6.5% fixed loan for 6 yrs 10 mos. If the index stays at 4%, the rate settles at 6.75% and the ARM is still $11,466 ahead after 10 years.
| Starting rate | Starting payment | Worst case stays ahead for | Worst case after 10 years | Index flat after 10 years |
|---|---|---|---|---|
| 5% | $2,147 | 8 yrs 7 mos | -$16,791 | $27,627 |
| 5.5% | $2,271 | 7 yrs 4 mos | -$37,263 | $16,850 |
| 5.75% | $2,334 | 6 yrs 10 mos | -$47,540 | $11,466 |
| 6% | $2,398 | 6 yrs 4 mos | -$57,841 | $6,085 |
| 6.25% | $2,463 | 5 yrs 9 mos | -$68,165 | $708 |
| Fixed period | Worst case stays ahead for | Highest payment |
|---|---|---|
| 3 years | 4 yrs 4 mos | $3,616 |
| 5 years | 6 yrs 10 mos | $3,545 |
| 7 years | 9 yrs 4 mos | $3,469 |
| 10 years | 13 yrs 2 mos | $3,345 |
The risk in planning to refinance before the reset
An ARM only saves you money if you leave in time or rates cooperate. Leaving means selling or refinancing, and neither is promised. The CFPB suggests asking what happens if your home's value falls, or if a job loss or illness damages your credit. Either could block a refinance right when you need one. Test it with the refinance calculator.
- Your payment isn't your whole bill. Taxes and insurance sit on top, and they can rise too. See the full figure in the mortgage calculator.
- Income checks. Try the worst-case rate in the home affordability calculator. A payment of $3,545 needs far more income than $2,334.
- Comparing total cost. Points and fees change the math. This tool leaves them out, so check your Loan Estimate.
- Paying extra helps. With $300 extra each month, the worst-case peak in our example falls to $3,273, because each reset recalculates on a smaller balance. Since each reset also lowers the required payment, the loan still runs close to its full term, but worst-case interest drops by $123,334. Check your note for a prepayment penalty first.
The model assumes caps work the same in both directions and that your rate isn't rounded. Your note may differ, so check it, and see the disclaimer beside the results. A HUD-approved housing counselor can review an offer with you, often at little or no cost.
Common questions
What is a 5/1 ARM versus a 5/6m ARM?
The CFPB explains that the first number is how long the initial rate lasts, and the second is how often it changes after that. A 5/1 changes once a year after year 5. A 5/6m changes every six months. Choose the matching option in the calculator.
Can an ARM payment go down?
Yes, if the index falls, down to a floor that's generally the margin. In the CFPB's example, the lowest payment is $838, compared with $911 at the start. Some ARMs also limit how far the rate can drop.
Does the calculator include extra payments and an amortization schedule?
Yes. Add extra payments in the advanced options, and the same amount goes to the fixed loan, where it shortens the term because that payment never resets. The results show payment-by-payment and yearly schedules under your index scenario, which you can download as CSV files.
Can I use this for an interest-only or payment-capped ARM?
No. It models a fully amortizing loan where each reset pays off the loan over the time left. Payment caps and interest-only periods change the math and can mean a growing balance, so ask the lender for those schedules.
What will the index do?
No one knows, and this calculator doesn't guess. The worst and best cases show the limits your caps allow. Your own scenario uses whatever steady change you enter, starting at zero.
Sources
- Consumer Handbook on Adjustable-Rate Mortgages · Consumer Financial Protection Bureau
- What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan? · Consumer Financial Protection Bureau
- For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work? · Consumer Financial Protection Bureau
- Find a housing counselor · Consumer Financial Protection Bureau