- Adjustable-rate mortgage (ARM)
- A mortgage whose rate is fixed for an initial period and then resets at set intervals, based on a market index plus a margin, within rate caps. A 5/1 ARM is fixed for five years and then adjusts once a year. This calculator compares one ARM scenario against a fixed-rate loan of the same amount and term.
- Fixed-rate mortgage
- A mortgage whose interest rate and principal-and-interest payment stay the same for the whole term. It usually starts at a higher rate than an ARM’s initial rate, in exchange for certainty. Its total cost in this calculator is known in advance, while the ARM’s depends on the rate you assume.
- Total cost
- The sum of all principal and interest payments over the full term. The ARM total here combines payments at the initial rate with payments at the adjusted rate for the remaining years. The difference between the two totals is the lifetime savings or extra cost of choosing the ARM.
- Initial rate
- The introductory interest rate during the ARM’s fixed period, often lower than a comparable fixed-rate loan. The gap between it and the fixed rate is what the ARM saves during the fixed period. Whether that saving survives depends on how high the rate goes after the reset.
- Fixed period
- The number of years the initial rate is locked before the first adjustment, such as 5 on a 5/1 ARM or 7 on a 7/1. If you expect to sell or refinance before it ends, the ARM’s later rate may never apply, which is why this period weighs heavily in the comparison.
- Adjusted rate
- The estimated rate after the fixed period ends. In practice it equals the index value at reset plus the margin, limited by the caps, and it can change again at each later adjustment. This calculator holds your estimate for the rest of the term, so testing a few values shows how sensitive the result is.
- Rate caps
- Limits on how much an ARM rate can change: at the first adjustment, at each later adjustment, and over the life of the loan. They are set in the loan documents and vary by lender and product. Entering the highest rate the caps allow gives a worst-case view of the ARM in this comparison.
- Loan term
- The length of time scheduled to repay the loan in full. A longer term lowers each payment but keeps the balance outstanding longer, so total interest rises. The same term is applied to both loans here, and the ARM’s term includes its fixed period.
