About the ARM vs Fixed Rate Calculator
This ARM vs fixed rate calculator compares the true cost of an adjustable-rate mortgage (ARM) with a fixed-rate mortgage over the years you actually expect to keep the loan. An ARM such as a 5/1 or 7/1 starts with a lower rate for the initial fixed period and then adjusts; a fixed-rate loan keeps the same rate and payment for its whole life. Enter both rates, the rate you expect after the ARM resets and the ARM’s caps to see payments year by year.
It suits buyers who might sell, refinance or pay off the loan within 5 to 10 years, where an ARM’s lower starting rate can save real money, and anyone who wants to know the worst-case payment before signing. The comparison counts interest paid over your holding period, which is the actual cost difference because principal repaid is your own equity.
Adjustments are modelled once a year after the initial period, limited by the first-adjustment, periodic and lifetime caps. Many newer ARMs adjust every six months (for example 5/6 SOFR ARMs); the annual model is a close approximation for comparing options.
With the default inputs, the arm savings over your stay is $2,083.03. Change any value above to recalculate instantly.
How to use the arm vs fixed rate calculator
- 1Enter the loan amount, term and the fixed rate you were quoted.
- 2Enter the ARM’s initial rate and its initial fixed period (5/1, 7/1…).
- 3Enter the rate you expect after the reset and the ARM’s caps (often 2/2/5).
- 4Set how many years you expect to keep the loan before selling or refinancing.
- 5Compare the savings, the highest expected payment and the worst-case payment.
Formula and method
Both loans start with the standard amortization formula on the full loan over the full term. The fixed payment never changes. For the ARM, the initial rate applies for the fixed period; at each yearly adjustment the rate moves toward your expected reset rate but by no more than the first-adjustment cap (first reset) or periodic cap (later resets), and never above the initial rate plus the lifetime cap. Each time the rate changes, the payment is recalculated on the remaining balance B over the k months left.
The comparison adds up interest paid on each loan over the years you expect to keep it. Because principal repaid becomes your equity either way, interest is the real cost difference. The worst case assumes the rate rises as fast as the caps allow to the lifetime maximum.
- M
- Monthly principal and interest payment
- B
- Loan balance when the payment is (re)calculated
- r
- Monthly interest rate (annual rate ÷ 12 ÷ 100)
- k
- Months remaining in the term
Worked examples
5/1 ARM at 5.5% vs 6.5% fixed, kept 10 years
On $280,000 the ARM saves about $180 a month for five years. When it resets to 7.5% (within the 2% first cap) the payment rises to about $1,913. Over ten years the ARM still costs about $2,083 less interest — a thin margin — and in the worst case (rates climbing to the 10.5% ceiling) the payment could reach about $2,427.
Same loan kept for the full 30 years
If you keep the loan for all 30 years and rates settle at 7.5% after year five, the ARM costs about $32,200 more interest than locking 6.5% — the early savings are wiped out by 25 years at the higher rate.
7/1 ARM kept only 7 years
Selling before a 7/1 ARM ever adjusts means you only pay the 6% rate. On $400,000 the payment is about $196 lower than 6.75% fixed, and you save roughly $21,100 in interest over the seven years.
Frequently asked questions
When is an ARM better than a fixed-rate mortgage?+
An ARM usually wins if you will sell, refinance or pay off the loan before or soon after the first adjustment, or if rates fall. A fixed rate is safer if you plan to stay long-term or your budget cannot absorb a higher payment.
What does 5/1 or 7/6 ARM mean?+
The first number is how many years the initial rate is fixed. The second is how often it adjusts afterwards: “1” means every year and “6” means every six months. So a 7/6 ARM is fixed for seven years, then adjusts every six months.
What are ARM rate caps like 2/2/5?+
They limit rate changes: the first number caps the first adjustment, the second caps each later adjustment, and the third caps the total rise above the initial rate over the loan’s life. A 5.5% ARM with 2/2/5 caps can never exceed 10.5%.
How is the new ARM rate set?+
At each adjustment the rate becomes the index (usually SOFR today) plus the lender’s fixed margin, limited by the caps. Your loan documents state the index, margin and caps, and lenders must notify you before payments change.
Can I refinance an ARM before it adjusts?+
Yes, if you qualify at the time and rates are favourable. Plan for closing costs of roughly 2%–5% of the loan, and do not rely on refinancing: if rates rise or your credit or income changes, it may not be available.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.
Sources