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Category Mortgage & Loans

Loan Details

Loan Amount ($)

Loan Term (years)

Initial Interest Rate (%)

Fixed-Rate Period (years)

Adjustment Interval (months)

Rate Caps

Initial Adjustment Cap (%)

Periodic Adjustment Cap (%)

Lifetime Cap (% above initial)

Rate Floor (%)

Rate Assumption

Expected Index Rate at Adjustment (%)

Lender Margin (%)

Scenario Analysis (Optional)

Rate Scenario

Enter your loan details and click Calculate

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About

An adjustable-rate mortgage recalculates the borrower's payment at fixed intervals based on a reference index plus a lender margin. The initial rate r₀ holds for a fixed period (commonly 3, 5, 7, or 10 years), after which it resets annually. Each reset is bounded by a periodic adjustment cap c_p and a lifetime ceiling c_L, preventing unlimited rate increases. Miscalculating the worst-case payment can lead to payment shock - a sudden increase of 30 - 60% that triggers default. This calculator builds a month-by-month amortization under user-specified rate assumptions, exposing total interest cost and maximum possible payment under cap constraints.

The model assumes the rate adjusts to index + margin at each reset, subject to periodic and lifetime caps. It does not account for negative amortization, payment caps distinct from rate caps, or teaser-rate buydowns. Pro tip: compare your ARM's worst-case total cost against a 30-year fixed to quantify the actual risk you are accepting.

Formulas

The monthly payment during any rate period is computed using the standard annuity formula applied to the remaining balance and remaining term:

M = B ⋅ r ⋅ (1 + r)ⁿ(1 + r)ⁿ − 1

Where M = monthly payment, B = remaining principal balance at the adjustment point, r = monthly interest rate (annual rate ÷ 12), n = remaining number of monthly payments.

At each adjustment boundary, the new annual rate is determined by:

R_new = min(max(I + m, R_floor), R_prev + c_p, R₀ + c_L)

Where I = current index rate (e.g., SOFR), m = lender margin, c_p = periodic cap, c_L = lifetime cap over the initial rate R₀, and R_floor = margin (typical floor). The first adjustment uses the initial cap c_i instead of c_p.

Monthly interest and principal allocation follow:

Interest_k = B_k−1 ⋅ r

Principal_k = M − Interest_k

B_k = B_k−1 − Principal_k

Reference Data

ARM Type	Fixed Period	Initial Cap	Periodic Cap	Lifetime Cap	Typical Margin	Common Index
1/1 ARM	1 yr	1%	1%	5%	2.75%	SOFR
3/1 ARM	3 yr	2%	2%	5%	2.75%	SOFR
5/1 ARM	5 yr	2%	2%	5%	2.75%	SOFR
5/6 ARM	5 yr	1%	1%	5%	2.50%	SOFR
7/1 ARM	7 yr	2%	2%	5%	2.75%	SOFR
7/6 ARM	7 yr	1%	1%	5%	2.50%	SOFR
10/1 ARM	10 yr	2%	2%	5%	2.75%	SOFR
10/6 ARM	10 yr	1%	1%	5%	2.50%	SOFR
SOFR = Secured Overnight Financing Rate (replaced LIBOR in 2023). CMT = Constant Maturity Treasury.
Common Cap Structures (Initial / Periodic / Lifetime)
2/2/5	Most common for 5/1 and 7/1 ARMs. First adjustment ≤ 2%, subsequent ≤ 2%, max 5% over initial.
2/2/6	Higher lifetime ceiling. Common in competitive markets.
5/2/5	Generous first-adjustment cap. Seen on 3/1 and 5/1 products.
1/1/5	Conservative caps. Typical for 5/6-month and 7/6-month ARMs.
2/1/5	Higher first cap, tighter subsequent. Protects after initial shock.

Frequently Asked Questions

Both caps apply simultaneously. At each adjustment, the new rate cannot exceed the previous rate plus the periodic cap, AND it cannot exceed the initial rate plus the lifetime cap. The binding constraint is whichever yields the lower ceiling. For example, with a 2/2/5 structure starting at 5%, after the first adjustment the rate cannot exceed 7% (initial cap). If the rate reaches 9% after several adjustments, the lifetime cap binds at 10% (5% + 5%), so the periodic cap of 2% still allows a rise to 11% in theory, but the lifetime cap restricts it to 10%.

Most ARM contracts specify a floor rate equal to the margin. If the index drops to 0%, your rate would be 0% + margin. In practice, most lenders set the floor at the margin value (typically 2.50-2.75%), so your rate rarely drops below the initial rate. This calculator uses the margin as the floor unless you specify otherwise.

In the best case (index stays low), ARM rates remain near the initial rate and total interest can be 20-40% less than a 30-year fixed. In the worst case (index rises to cap every period), the rate climbs to the lifetime ceiling quickly - often 4-5 percentage points above the start rate - and holds there for the remaining 20+ years. On a $400,000 loan, this difference can exceed $150,000 in total interest paid.

A 5/1 ARM adjusts the rate once per year after the fixed period. A 5/6-month ARM adjusts every 6 months. The 5/6 ARM typically has tighter periodic caps (1% vs 2%) to compensate for more frequent adjustments. Over time, the 5/6 ARM can reach the lifetime cap faster due to twice as many adjustment opportunities, but each individual jump is smaller.

Yes. Calculate the maximum possible payment under the lifetime cap and compare it to the fixed-rate equivalent. If the worst-case ARM payment exceeds your comfortable debt-to-income ratio (typically 28% of gross monthly income for housing), the ARM carries meaningful default risk. The savings during the fixed period must be weighed against the tail risk of elevated payments for 20+ years.

Extra payments reduce the outstanding balance. At each adjustment, the new payment is recalculated on the lower balance. This means even if the rate rises to the cap, the actual dollar payment increase is smaller than projected. Prepaying during the initial low-rate period is particularly effective because more of each dollar goes to principal reduction.