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ARM vs. Fixed Rate Mortgage
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.
Use this calculator to compare a fixed rate mortgage
to two types of ARMs, a Fully Amortizing ARM
and an Interest Only ARM.
Fixed Rate Mortgage and ARM Definitions
- Fixed Rate Mortgage
- A fixed rate mortgage has the same interest
rate and monthly payment throughout the term
of the mortgage. The payment is calculated
to payoff the mortgage balance at the end
of the term. The most common terms are 15
year and 30 years.
- Fully Amortizing ARM
- This is the most common type of ARM. The
monthly payment is calculated to payoff the
entire mortgage balance at the end of the
term. The term is typically 30 years. After
any fixed interest rate period has passed,
the interest rate and payment adjusts annually.
A Fully Amortizing ARM will also have a maximum
rate that it will not exceed. This calculator
uses a maximum interest rate of 12%. Below
is a list of the most common types of Fully
Amortizing 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. |
| 1 year ARM |
Fixed for
12 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
- 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.
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