ARM vs. Fixed-Rate Mortgage Calculator

Understanding the ARM vs. Fixed-Rate Calculator

Choosing between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage is a significant decision. A fixed-rate mortgage offers predictability, while an ARM offers a lower initial rate at the cost of future uncertainty. This calculator is designed to help you compare the two options and identify the financial break-even point.

How It Works

The calculator models the payment schedule and total cost for both a fixed-rate loan and an ARM based on your inputs.

• Fixed-Rate Mortgage: The calculation is straightforward, using the standard mortgage amortization formula for a single, consistent interest rate over the entire loan term.
• Adjustable-Rate Mortgage (ARM): This is a two-part calculation. First, it calculates the lower payment during the initial fixed-rate period. Then, it determines the new, higher payment for the remainder of the loan term based on the remaining balance and the expected adjusted interest rate.

The Break-Even Point

The key insight from this calculator is the break-even point. During the initial period, the ARM has lower payments, allowing you to save money compared to the fixed-rate option. After the rate adjusts, the ARM payment typically becomes higher, and those savings begin to erode. The break-even point is the moment in time when the total extra cost of the higher adjusted payments equals the total savings from the initial lower-rate period. If you plan to sell or refinance before this point, the ARM is likely the cheaper option. If you stay longer, the fixed-rate loan would have been more cost-effective.

Frequently Asked Questions