What this calculator does
An adjustable-rate mortgage fixes the rate for an opening period, then resets it to an index plus a margin, subject to caps. The opening payment is what gets advertised; the caps are what determine your actual exposure.
The worst case is worth knowing before signing. On a $400,000 loan opening at 5.5 per cent, the payment is $2,271.16, but a 5 point lifetime cap allows it to reach $3,491.98, an increase of 53.8 per cent.
The formula
The opening payment amortises the loan at the initial rate over the full term. The balance at the reset date is then re-amortised over the remaining term at the new rate, which is the index plus margin limited by the periodic and lifetime caps.
| Term | Meaning |
|---|---|
| Fully indexed rate | Index plus margin, which is the rate before caps are applied. |
| Periodic cap | The most the rate may move at a single adjustment. |
| Lifetime cap | The most the rate may ever rise above the initial rate, which sets the worst case. |
The inputs explained
| Field | What to enter |
|---|---|
| Loan amount ($) | The loan amount. |
| Loan term (years) | The total loan term in years. |
| Initial fixed rate (%) | The initial fixed rate, which applies during the opening period. |
| Fixed-rate period (years) | How many years the initial rate lasts. |
| Current index rate (%) | The current value of the index the loan tracks. |
| Lender margin (%) | The lender margin added to the index, which does not change over the loan. |
| Periodic adjustment cap (%) | The maximum rate movement at any single adjustment. |
| Lifetime cap (over initial rate) (%) | The maximum the rate may rise above the initial rate over the life of the loan. |
When to use it
Testing whether you could afford the worst case
The lifetime cap payment is the figure to budget against, not the opening one.
Comparing an ARM against a fixed rate
The opening discount has to be weighed against the exposure after reset.
Planning around a known sale date
An ARM can suit a borrower certain of selling before the fixed period ends.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How does the index level affect the reset?
The same loan resetting against three index levels.
| Index at reset | Rate at first adjustment (capped) | Payment after first adjustment |
|---|---|---|
| 3.5% | 6.00% | $2,382.90 |
| 4.5% | 7.00% | $2,613.97 |
| 6.5% | 7.50% | $2,733.10 |
Questions
What does 5/1 ARM mean?
Five years at the initial fixed rate, then adjusting once a year after that. The first number is the fixed period in years and the second is how often it adjusts afterwards.
Can the periodic cap protect me indefinitely?
No. It limits how fast the rate can climb, not how far. If the index stays high, successive adjustments walk the rate up to the lifetime cap over a few years, which is why the worst-case figure matters.
Why is the payment increase larger than the rate increase?
Because the payment also re-amortises over a shorter remaining term. On a 30 year loan resetting at year five, the balance now has 25 years rather than 30 to be repaid, which lifts the payment beyond the rate effect alone.
When does an ARM make sense?
When you are confident of selling or refinancing before the fixed period ends, or when you could genuinely absorb the capped worst case. Relying on rates falling, or on being able to refinance later, is the assumption that catches people out.
For a conventional fixed loan, see the loan payment calculator. For whether refinancing out of one pays, see the refinance breakeven calculator.