Adjustable Rate Online Mortgage Calculator

Is an ARM right for you?

When purchasing a house, it's normal to need assistance with the transaction. While finding the right home can often be fun and rewarding, working out the finances can be difficult. Some immediate questions should come to mind – Like, would you prefer fixed or variable payments? On this page, you can find an in-depth analysis of adjustable rate mortgages with links to other relevant resources. You will learn about the risks associated with an ARM, along with the benefits. Beyond that, you can find a discussion of what makes an ARM the right choice for certain individuals.

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Your mortgage loan
With a plethora of mortgage options on the market, it can be challenging to pick the loan structure that compliments you. You have to consider your budget, future plans, and the time you have to pay back the loan. A common option is a fixed mortgage, where the monthly payments always stay the same. Alternatively, you can opt for an adjustable rate mortgage (ARM), where the interest rate can fluctuate. While that can sound alarming, many homeowners will benefit from a loan with variable payments.
Picking the right loan is essential for many reasons. Like most people, you probably want to make sure your earnings are being used effectively. A fixed rate mortgage can provide more stability than an ARM but can be more expensive too.
What is an ARM?
An ARM, adjustable rate mortgage, is a type of secured loan. When a loan is secured, that means the loan issuer has collateral for the funds being borrowed. If the lender doesn’t receive their payments, they could take possession of the belonging the loan is tied to. In the case of a mortgage, the collateral is real estate.
An ARM is unique because of its structure. It is a loan that starts with fixed payments, which can last for many months or years. After the fixed period, the interest rate on the loan can change periodically. At this point, your monthly payments could go up or down without much notice. An ARM should not be confused with a fixed rate mortgage, which has the same interest rate for the entire term.
How does an ARM work?
To understand how an ARM works, first, you have to know what goes into a mortgage. To make lending money beneficial for the bank, they have to charge a fee for their money. As a result, your monthly payment has a principal and interest portion. The principal is the part of your obligation that returns the money you borrowed. Meanwhile, interest is the cost of borrowing the funds.
Your ARM interest rate is pre-set for the introductory period, based on your creditworthiness. Generally, interest rates tend to be lower on ARMs then fixed mortgages. This is due to the stricter qualification criteria for variable mortgages.
Later on, your rate is influenced by two components: the margin and an index. Once the periodic adjustments begin, your interest rate can change based on these factors. You can establish a cap so that there is a limit to how much your payments can change.
To understand if a variable mortgage is right for you, it’s best to dissect the features of an ARM. Even ARMs can vary a lot in their structure. Therefore, it’s possible to find one ARM that fits your needs more than another.
ARM components
Your lender is required to provide written information on the ARM that you are considering. The details should include the terms and conditions concerning the loan. They should specify your initial rate, the index and margin, when rate adjustments will take place, and if there are any limits on the changes.
Your initial rate and APR The initial rate on an ARM can last for a limited period – usually ranging between 1 month and 10 years. The initial interest rate will be lower than that of a comparable fixed rate mortgage. Over this time, your payments shouldn’t change. Sometimes, the introductory rate can be offered as a “teaser”, so it’s important to figure out your APR. If the APR is much higher then your initial rate, your payments will be a lot higher after the first rate adjustment too – even if your index stays relatively the same.
The margin.The interest rate on a variable mortgage depends on two factors: the margin and the index. The margin is the base percentage the bank will use to set your interest. The average margin is between 2.74% to 3.04% but can vary by lender. This figure won’t change over the course of the loan. When you add an index to the margin, you get your fully indexed rate.
The index. The index is the second component of your variable interest rate. It is a general rate that banks use to lend to other financial institutions. This figure can fluctuate based on many economic factors. If the index moves up, your interest rate and payments will be higher. Lenders set variable mortgage rates using a variety of indexes. The most commonly used indexes are CMT securities, COFI, and LIBOR. Some indexes can fluctuate more than others, so it’s important to understand which one your loan is tied to. You can find a lot of information on the different indexes through a simple Internet search.
Periodic adjustments. The rate on variable mortgages can change at different frequencies. Some rates vary every month or quarter, while others adjust once a year. The time between adjustments is called the adjustment period. Let’s say your loan has an adjustment period of 1-year after 5-years of fixed payments. In this case, it’s called a 5/1 ARM. The 5 refers to the five years initial rate, while the 1 describes that yearly adjustments will take place afterward.
Rate caps. An interest rate cap can limit the amount your payments will change. You can set a cap for the initial adjustment, the periodic adjustments, and total adjustments over the life of the loan. The most common cap arrangement is 6/2/6. This means the rate can adjust up to 6% once the loan becomes adjustable. Periodic adjustments would be limited to a 2% change, and the loan could only adjust by a maximum of 6% throughout the total term.
Is an ARM right for me?
A variable mortgage can be an excellent choice for many homeowners. It is an option for individuals with exceptional credit, because it’s tougher to qualify for. In return, applicants receive a favorable interest rate.
If you are considering an adjustable mortgage, it’s important to have definite future plans. Most individuals intend to sell the home before the end of the introductory period. For example, if you got a 10/1 ARM, you probably have plans to move within the next ten years.
Some homeowners choose to refinance the mortgage before the end of the adjustment period. For this to be an option, your credit and income would have to be in good order. Since the future can be difficult to predict, this could be a risky option. If mortgage rules change, or you come on hardship, you may get stuck with interest rates you can’t afford. This is especially true for variable loans with lengthy initial rates.
If you get an ARM with a shorter introductory period, this arrangement can be more feasible. Let’s say you have a stable job history and can probably count on things staying relatively the same for the next few years. A 3/1 ARM could be a great tool to increase your savings.
In other cases, when the future is not as obvious, a fixed mortgage is often the best choice. If you are still unsure, it can be helpful to crunch some numbers. From your answers you can get a better sense of the overall picture.
Using the calculator
The ARM calculator is very straightforward to use. It has two parts: an information section and integrated results. You can plug in numbers from your lender, or just try out market averages. The results should give you some indication of whether this type of loan will be suitable for you. All you have to do is provide some simple details about the financing you need. Let’s review this together:
Step 1. The first few questions relate to your basic loan needs. On the first line of the calculator, set the loan amount you require. You can use the arrow keys or your keyboard to make this input easier.
Step 2. On line two, select the length of your term by using the drop-down menu. As a note, the more time you take to pay off a loan, the more you will pay in interest.
Step 3. Please identify an interest rate on line three. The interest rate a lender offers can rest on many factors. Among these are your income and liabilities, and the amount you want to borrow. The lender will also have to consider the property tied to the loan when setting your rate.
Step 4. Next, you can decide if you would like to see your payments split up by month or by year. You can switch between reports at any time without losing information.
Step 5. The next few questions relate to the variable aspect your loan. On the fifth line of the calculator, specify the time you have before your first adjustment. Please document this number in months.
Step 6. On the next line, add the months between adjustments; your adjustment period.
Step 7. Finally, please set a total interest rate cap on the final line of the calculator.
Once you have completed the questionnaire, you can view your results. There is a smart summary of your payment details to the right of the inputs. Here you can see what your monthly payment will start out as, along with the maximum it can go up to.
Below the inputs are various reports to illustrate your financing needs. In this section you can view the balance payoff, periodic adjustments, and payment schedule.
Remember to bookmark this calculator and save it to the home screen of your smartphone. You can return as you get more offers or if your finances change. Through the export manager, you can forward your results to family, friends, or a mortgage professional. If you found this page useful, you can promote us on social media by using the share feature.