ARM vs Fixed-Rate Mortgage Risk Calculator
Example: Loan amount: 400000 $ · ARM teaser (start) rate: 5.75 %/yr · Comparable 30-year fixed rate: 6.875 %/yr · ARM fixed period (e.g. 5 for 5/1 ARM): 5 yrs · Per-adjustment rate cap: 2 % · Lifetime rate cap above start rate: 5 % · ARM margin (lender's spread): 2.75 % · Current index rate (e.g. SOFR): 4.5 %
| Worst-case adjusted payment after teaser | $2,803 |
| ARM teaser monthly payment | $2,334 |
| Fixed-rate monthly payment | $2,628 |
| Total savings during teaser period | $17,605 |
| Expected adjusted payment (fully-indexed rate) | $2,682 |
Worked example
On a $400,000 loan: 5/1 ARM at 5.75% costs $2,334/month vs fixed at 6.875% ($2,627/month) — saving $293/month, or $17,580 over 5 years. But at the first adjustment with a 2% cap, the rate jumps to 7.75% and the remaining balance payment rises to roughly $2,870 — $243/month more than the fixed rate you declined. At the 5% lifetime cap (10.75%) worst case, payment could reach $3,450. The ARM wins if you sell or refi before year 7; it loses badly if you stay.
Frequently asked questions
What index does my ARM use and why does it matter?
Most U.S. ARMs now use SOFR (Secured Overnight Financing Rate). The rate adjusts to index + margin at each adjustment date. CFPB regulations require lenders to disclose the index, margin, and caps in your Loan Estimate. The fully-indexed rate (index + margin) is your best estimate of where the rate heads after the teaser.
What are the standard ARM caps?
Most 5/1 ARMs have a 2/2/5 cap structure: 2% maximum at first adjustment, 2% per subsequent adjustment, 5% lifetime cap above the initial rate. Always verify your specific caps in the Loan Estimate — they vary by lender and product.
When does an ARM make financial sense?
An ARM makes sense when you have high confidence you will sell or refinance before the first adjustment. Short planned stay (under 5 years for a 5/1), high savings discipline, and a clear sell/move plan all favor the ARM. If there is meaningful uncertainty about your stay duration, the fixed-rate risk premium is usually worth paying.