ARM versus fixed rate calculator
The caps are the product. This runs the worst case the contract allows, a flat index, and a ramp, re-amortizing the balance at every reset.
Worked example — The most this payment could ever be: $4,609. At 10.750%, against $3,287 fixed, on a $520,000 loan starting at 5.75%
5/1 ARM, standard 2/2/5 caps: The most common ARM structure quoted on today’s Loan Estimates.
Index assumptions and discount rate 3
These are your assumptions, not a live index: this page carries no market data feed.
What is the most my ARM payment could ever be?
On the default 5/1 ARM with 2/2/5 caps, the contract allows the payment to reach $4,609 a month, at a rate of 10.750%, reached as fast as the initial and periodic caps allow with the balance re-amortized at every reset. That is $1,322 above the $3,287 fixed payment, from a note that starts at $3,035. This is the number to decide on, not the first payment.
5/1 ARM vs 30-year fixed: at what index level do they cost the same?
Bisecting for the constant index level at which the ARM's discounted cost equals the fixed loan's gives 4.18%, against an assumed 3.25% today. Above that level the fixed loan was the better choice; below it, the ARM was.
Worst-case payment by standard cap structure
Capped maximum payment and break-even index for the three standard cap conventions, at the same $520,000 loan and rates.
| Cap structure | Capped maximum payment | Break-even index |
|---|---|---|
| 2/2/5 | $4,609 | 4.18% |
| 5/2/5 | $4,544 | 4.44% |
| 2/1/5 | $4,686 | 3.98% |
What we think
An ARM is a bet on the index, and it should be taken only by a borrower who can pay the capped maximum without changing how they live. If that payment would force a sale, the discount is not a discount, it is a short volatility position with your house as collateral. Two cases where the bet is genuinely good: a documented plan to be gone before the first reset, which makes the teaser period the whole loan, and enough liquid assets that the ceiling is simply an annoyance. Outside those, take the fixed rate and treat the spread as the price of not having to think about rates again.
The next question after this one
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What Pro adds here
User-supplied index paths, simulated rate scenarios, and interest-only and negative-amortization structures are Pro features. The launch list sends one email at launch.