ARM & Interest Only ARM vs. Fixed Rate Mortgage
Use this calculator to compare a fixed-rate mortgage to two types of ARMs, a Fully Amortizing ARM and an Interest Only ARM. A fixed-rate mortgage has the same payment for the entire term of the loan. An adjustable rate mortgage (ARM) has a rate that can change, causing your monthly payment to increase or decrease.
ARM & Interest Only ARM vs. Fixed Rate Mortgage Definitions
- Fixed-Rate Mortgage
- A fixed-rate mortgage has the same interest rate and monthly payment throughout the term of the mortgage.
- Fully Amortizing ARM
- This calculator shows a "fully amortizing" ARM, which is the most common type of ARM. The monthly payment is calculated to pay off the entire mortgage balance at the end of a 30-year term. After the initial period, the interest rate and monthly payment adjust at the frequency specified. The amount an ARM can adjust each year, and over the life of the loan, are typically capped. Below is a list of common ARMs.
Common Adjustable Rate Mortgages ARM Type Months Fixed 10/1 ARM Fixed for 120 months, adjusts annually for the remaining term of the loan. 7/1 ARM Fixed for 84 months, adjusts annually for the remaining term of the loan. 5/1 ARM Fixed for 60 months, adjusts annually for the remaining term of the loan. 3/1 ARM Fixed for 36 months, adjusts annually for the remaining term of the loan.
- Interest Only ARM
- An Interest Only ARM only requires monthly interest payments. Since you are not paying any principal, as you are with the other two types of mortgages described above, this can lower your monthly payment. However, since your mortgage's principal balance is not decreased, you will have a balloon payment at the end of the mortgage's term. Like a Fully Amortizing ARM, an Interest Only ARM will often have a period where the interest rate is fixed, and then it is adjusted annually. An Interest Only ARM will also have a maximum interest rate that it will not exceed. This calculator uses a maximum interest rate of 12%.
- Mortgage amount
- Original or expected balance for your mortgage.
- Term in years
- The number of years over which you will repay this mortgage. The most common mortgage terms are 15 years and 30 years. Please note that for the Interest Only ARM you will have a balloon payment for the entire principal balance at the end of the loan term.
- Expected rate change
- The annual adjustment you expect in your ARM. The range for this calculator is minus 3% to plus 3%. Use a negative value if you believe interest rates will decrease, a positive value if you believe they will increase.
- Interest rate
- Annual interest rate for each mortgage type. Typically an ARM will have a lower interest rate than a fixed-rate mortgage. The rate of an Interest Only ARM will vary by lender.
- Months rate fixed
- This is the number of months the rate is fixed for an ARM. During this period the interest rate and the monthly payment will remain fixed. The rate will then adjust annually by the expected rate change.
- Interest rate cap
- This is the maximum interest rate for this mortgage. The mortgage's interest rate will never exceed the interest rate cap.
- Monthly payment
- Monthly principal and interest payment (PI) for the fixed-rate Mortgage and the Fully Amortizing ARM. This is an interest only payment for an Interest Only ARM.