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ARM vs fixed rate mortgage calculator: Which one should you choose?

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Updated: April 12, 2024

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Jumping into homeownership? Picking the right type of mortgage is just as key as finding your dream home. 

You have adjustable-rate mortgages (ARMs) and fixed-rate mortgages, each with its own perks and quirks. That’s why learning to use an ARM vs. Fixed-rate mortgage calculator is a game changer.

It's more than just crunching numbers—it's about making an intelligent choice that fits your financial plans and lifestyle like a glove. 

Simply enter your mortgage details, like the rate you're hoping for and your home's value. This tool will provide insights on whether a fixed-rate mortgage, with its steady payments or an ARM, with its changing rates, suits you best. 

Plus, it clearly explains the difference between fully amortizing and interest-only ARMs. Let's make this decision smooth, guiding you to the best pick for your home sweet home.

(Below the calculator, we provide all the helpful definitions, making sure no stone is left unturned.)

The calculator

ARM & Interest Only ARM vs. Fixed Rate Mortgage


  • What is the SOFR benchmark?

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    SOFR, or the Secured Overnight Financing Rate, is a key term for mortgage shopping. Think of it as the overnight interest rate banks charge each other for loans secured by Treasury securities (basically, the government's way of borrowing money with a promise to pay back with a little extra). It's the cost of borrowing cash overnight, collateralized by U.S. government bonds, which are considered extremely safe.

    Why does SOFR matter to you? Because it's becoming the gold standard for setting interest rates across the financial industry and replacing the older LIBOR system. LIBOR got a bad rap due to manipulation and transparency issues, leading to a shift towards SOFR based on actual, completed transactions, making it more reliable and reflective of the market.

    Understanding SOFR is vital because it influences the interest rates you might pay on various loans or earn on savings accounts. As banks and lenders adjust to using SOFR for determining rates, it could impact your financial planning and decisions. It's a more transparent and trustworthy benchmark that helps ensure fairer lending and borrowing practices in finance.

Understand the difference

Understanding ARM and fixed rate mortgages

What is an adjustable rate mortgage (ARM)?

An ARM offers an interest rate that changes over time, typically in relation to an index (such as SOFR, LIBOR, Prime rate, or T-bill rates). This type of mortgage may start with a lower interest rate than fixed-rate mortgages, making it an attractive option for certain borrowers. Key features include the initial rate period, adjustment frequency, rate caps, and indexes to which the rate is tied.

  • Initial rate period: The initial phase during which the interest rate remains fixed before it starts adjusting. This period can last for months or years, and lower interest rates are offered to attract borrowers.
  • Adjustment frequency: Describes how often the interest rate on the ARM can change after the initial rate period. Common frequencies include annually, semi-annually, or monthly.
  • Rate caps: These are limits on how much the interest rate or the monthly payment can increase at each adjustment period or over the life of the loan. This protects borrowers from drastic increases in interest rates.
  • Indexes: The benchmark interest rates (like SOFR, Prime Rate, or T-Bill rates) that lenders use to determine how much to adjust borrowers' interest rates.

What is a fixed rate mortgage

Contrastingly, a fixed rate mortgage locks in an interest rate for the duration of the loan, providing stability and predictability in monthly payments. This type of mortgage is favored by borrowers who seek long-term security.

What is an interest only ARM?

A variant of ARM, the interest only ARM, allows for payments towards only the interest for a certain period, after which payments increase significantly as you start paying down the principal.

After the interest-only period ends, payments increase significantly for a few reasons:

  • Principal repayment begins: You start paying back the principal and interest on the loan. Since you have yet to reduce the principal during the interest-only period, these payments are higher because you have less time left in the loan term to spread out the principal repayment.
  • Adjustable rate: If the loan's interest rate adjusts (increases) after the initial period based on its index, your payments could increase even more. This adjustment adds to the total amount you owe each month.

The Interest Only ARM (Adjustable Rate Mortgage) is a specific type of mortgage that initially allows you to pay just the interest on the loan for a predefined period without paying down any of the principal balance. This "certain period" typically lasts 5 to 10 years, depending on the specific terms of the mortgage.

  • Why would someone choose an interest-only ARM?

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    There are several reasons a borrower might opt for an Interest Only ARM, including:

    Lower initial payments: The initial lower payment period can be attractive if you anticipate a higher income in the future. It makes it easier to afford a home now while planning for larger payments later.

    Investment strategy: Some borrowers might prefer to invest the money saved from lower initial payments elsewhere, expecting to earn a return greater than the cost of the mortgage interest.

    Flexibility: This type of mortgage offers financial flexibility during the interest-only period. Borrowers can make principal payments if they wish but are only obligated to once the period ends.

    Temporary situation: If a borrower plans on selling the home or refinancing the mortgage before the interest-only period ends, they might not be concerned with the impending payment increase.

    You must fully understand the risks involved, especially the possibility of facing significantly higher payments once the interest-only period ends and the impact of potential rate increases if the ARM adjusts upwards.

  • How often does an ARM rate change?

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    The frequency at which an Adjustable Rate Mortgage (ARM) rate changes depends on the specific terms of the mortgage. Here are the most common adjustment intervals:

    Annual adjustments: Many ARMs have a yearly adjustment period, meaning the rate changes once a year after the initial fixed-rate period ends.

    Semi-annual adjustments: Some ARMs adjust every six months, though this is rare.

    Monthly adjustments: Though rare, some ARMs adjust monthly. These are typically tied closely to a very short-term index rate.

    5/1, 7/1, 10/1 ARMs: These are examples of hybrid ARMs, where the first number represents the years the rate remains fixed, and the "1" signifies that after this initial period, the rate will adjust every year.

    The initial fixed-rate period before the first adjustment can vary significantly—from one year to 10 years or more. After this period, the ARM rate will adjust at the interval specified in the mortgage agreement. The adjustment frequency is an important factor to consider when choosing an ARM, as it affects how often your monthly payments could change.

Pros and cons

Pros and cons of a fixed-rate mortgage vs. an adjustable-rate mortgage

When comparing fixed-rate mortgages to adjustable-rate mortgages (ARMs), each has advantages and disadvantages, depending on your financial situation, risk tolerance, and long-term goals. Here's a breakdown of the pros and cons of a fixed rate mortgage:

Pros

Pros

  • Stability: Your interest rate remains the same for the life of the loan, making it easier to budget and plan for the future since your mortgage payments will not change.

  • Predictability: Since the monthly payment amount is fixed, it's easier to manage household expenses without worrying about interest rate fluctuations.

  • Simplicity: Fixed-rate mortgages are straightforward and easier to understand for most people, making the home-buying process less stressful.

  • Protection from rate increases: If interest rates rise in the future, your mortgage rate and monthly payments remain unaffected, saving you money over the long term compared to an ARM.

Cons

Cons

  • Higher initial rates: Fixed-rate mortgages typically start with a higher interest rate compared to the initial rate of an ARM, meaning you could pay more in interest costs initially.

  • Less flexibility: If interest rates fall, you're stuck with your higher rate unless you refinance, which involves additional costs and hassle.

  • Potentially more expensive in the short term: An ARM could be cheaper in the short term due to its lower initial rates if you plan to move or refinance within a few years.

  • Opportunity cost: By locking in a rate, you might miss out on savings if interest rates drop significantly. You would need to refinance to take advantage of lower rates, incurring additional costs.

When comparing these to an ARM, the primary considerations hinge on your financial stability, how long you plan to stay in your home, and your capacity to handle potential payment increases in the future. 

An ARM might offer lower initial payments and be a better option if you plan a shorter stay in your home or expect your income to increase before the rate adjusts. 

Meanwhile, a fixed rate mortgage offers peace of mind with consistent payments, making it an attractive choice if you’re planning to stay in your home long-term or prefer predictable budgeting.

Tyler Wade Content strategist & writer

Tyler Wade has worked in personal finance for over 5 years writing for brands like Ratehub, Forbes, KOHO, and now Moneywise.com.

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