Last updated: 2026-05-25

Definition and structure

An adjustable-rate mortgage (ARM) is a home loan where the interest rate stays fixed for an initial period — typically 3, 5, 7, or 10 years — and then resets annually based on a market index. The loan name encodes this structure: a 5/1 ARM is fixed for 5 years, then adjusts every 1 year thereafter. The appeal is a lower intro rate than the prevailing 30-year fixed; the risk is that the post-adjustment rate is unknown at origination.

How the math works

Initial monthly payment

During the fixed period, the ARM behaves identically to a fixed-rate loan. The monthly principal-and-interest payment uses the standard PMT formula:

where L is the loan amount, r₀ the initial annual rate (e.g. 0.055 for 5.5%), and n the total months (term × 12). On a $400,000 loan at 5.5% for 30 years, this is approximately $2,271/month.

Balance at adjustment

At the end of the fixed period (month _t_f × 12), the remaining principal is:

Mortgage amortization is front-loaded with interest: after 5 years of payments on a $400,000 5.5% loan, roughly 92% of the original principal ($369,800) is still outstanding.

Post-adjustment payment

When the rate resets to r₁, the lender re-amortizes the remaining balance over the remaining term:

where n_rem = (total term − fixed years) × 12. At a post-adjustment rate of 7.5%, the payment on the remaining $369,800 over 25 years becomes approximately $2,733/month — a $462 increase from the intro period.

Lifetime comparison

Total lifetime interest under each product:

The ARM advantage (positive = ARM wins) is simply the difference:

Worked example

Scenario: $400,000 loan, 30-year term, 5/1 ARM at 5.5% intro vs. 30-year fixed at 7%.

With the post-rate at 7.5%, the ARM saves only about $1,800 over its life — essentially a wash. The five years of intro savings (about $390/month below the fixed payment) are nearly cancelled out by paying half a point above the fixed rate for the remaining 25 years. Break-even sits right around 7.5%: nudge the post-rate higher and the ARM quickly costs more than the fixed, while pulling it down toward 7% or 6% widens the ARM's advantage to roughly $38,000 or $107,000. The rate at which savings cross zero is the break-even rate.

Rate caps

Real ARM contracts include two types of rate caps that bound the worst case:

• Periodic cap: maximum increase per adjustment (typically 1% or 2%).
• Lifetime cap: maximum total increase above the initial rate (typically 5%). A 5/1 ARM at 5.5% intro with a 5% lifetime cap cannot exceed 10.5%.

This calculator models a single assumed post-rate rather than a capped path. Treat the post-adjustment input as a stress-test value — enter the initial rate plus the lifetime cap to see the true worst-case payment and total cost.

When an ARM makes sense

An ARM tends to work best in three situations:

1. A planned sale or refinance before the fixed period ends. A borrower who exits at year 4 on a 5/1 ARM never experiences the adjustment, so the intro-rate savings are pure upside.
2. An expectation that rates will fall. If the post-rate ends up below the current 30-year fixed, the ARM wins on both the intro discount and the post-rate.
3. Income flexibility. A borrower who can absorb a $400–$600 payment jump without financial stress carries the rate risk comfortably.

An ARM is a poor fit when the borrower plans to stay in the home for the full term and needs payment certainty, when the post-rate at the lifetime cap would strain the budget, or when intro savings are narrow (under $100/month) relative to a fixed — too narrow to compensate for the rate risk.

What this calculator does not model

• Annual adjustments after year one of the variable period. Real ARMs adjust every year; this calc simplifies to one post-rate for the entire remaining term.
• Margin and index. The actual post-rate equals an index (SOFR or CMT) plus the lender's margin. This calc treats the post-rate as a direct input.
• Closing costs, points, and origination fees. These affect the true break-even when comparing an ARM against a fixed loan.
• Tax effects. The mortgage interest deduction (subject to the $750k cap and the standard-vs-itemize choice) varies by borrower and is not modeled.

For monthly payment with property tax, insurance, and PMI, see the Mortgage Payment Calculator. To compute how large a loan your income supports, see the Mortgage Affordability Calculator.