- Interest-only ARM
- An adjustable-rate mortgage whose early payments cover only interest, at an initial rate, for a set number of years. When that period ends, the rate resets and the payment is recalculated to repay the full balance over the remaining term. This calculator shows the payment before and after that reset.
- Adjustable-rate mortgage (ARM)
- A mortgage whose interest rate is fixed for an initial period and then adjusts at set intervals based on a market index plus a fixed margin, within limits set by rate caps. Payments can rise or fall after each adjustment. The initial rate is often lower than a comparable fixed rate.
- Interest-only period
- The years at the start of the loan when each payment covers only that month’s interest and no principal is repaid. The balance at the end of the period is therefore the full original loan amount. In this calculator the interest-only period also ends when the rate first adjusts.
- Initial rate
- The interest rate charged during the introductory period before any adjustment. The interest-only payment is the loan amount times this rate divided by 12 — $320,000 at 5.5% is about $1,467 a month. A low initial rate makes the early payment look affordable but says little about later payments.
- Adjusted rate
- The rate that applies after the first reset, normally the index value at that time plus the loan’s margin, limited by the caps. It is unknown in advance, so this calculator uses the rate you enter as an estimate. Testing a higher adjusted rate shows how exposed the payment is to rising rates.
- Payment shock
- The jump in the monthly payment when an interest-only period ends and the rate adjusts at the same time. The payment rises for two reasons: principal must now be repaid over fewer years, and the new rate may be higher. The “payment change” result is the size of that jump.
- Rate caps
- Limits in the loan contract on how much the rate can change at the first adjustment, at each later adjustment, and over the life of the loan. Caps vary by loan and are stated in the loan disclosures. The lifetime cap sets the worst-case rate, which is worth plugging into the adjusted rate field.
- Amortization
- Paying off a loan through equal scheduled payments that each cover that month’s interest plus part of the principal, so the balance reaches zero by the last payment. Here amortization starts only after the interest-only period, on the full balance, over the years left in the term — which is why the later payment is higher.
- Total interest
- The sum of all interest paid over the life of the loan: interest-only payments during the first period plus the interest portion of the amortizing payments after it. An interest-only structure generally costs more in total interest than a fully amortizing loan at the same rate, because the balance stays higher for longer.
