Fixed vs Adjustable Rate Mortgage Calculator

Fixed = standard amortization at one rate. ARM = the intro rate through the fixed period, then re-amortised at each adjustment using the rate scenario, bounded by the initial, periodic and lifetime caps. Future rates are unknown, so the result is modelled as scenarios — including the worst case at the lifetime cap.

The trade-off: a lower start for an uncertain future

An adjustable-rate mortgage — an ARM in the US, a floating-rate loan in India and much of South Asia — starts with a lower rate than a comparable fixed loan, fixed for an intro period (the “5” in a 5/1 ARM). After that, the rate adjusts periodically to a benchmark index plus a margin, so your payment can rise or fall with the market. The deal is simple: you take a guaranteed saving now in exchange for uncertainty later. Whether that is wise depends on how long you’ll keep the loan and how far rates might move — which is exactly what this calculator lays out.

It shows the fixed payment as a stable benchmark, the ARM’s low intro payment, the payment once it first adjusts under your scenario, and — crucially — the worst case if the rate climbs to its lifetime cap. Because nobody knows future rates, it models scenarios rather than pretending to predict; the worst case is always shown as the risk you are accepting.

Worked example — a $400,000 loan over 30 years: fixed at 6.5% versus a 5/1 ARM at 5.5% (fully-indexed 6.5%, 2/2/5 caps): The ARM starts at about $2,271/month versus $2,528 fixed — saving roughly $257 a month for five years. After it adjusts it settles near the fixed payment — but in the worst case it could reach about $3,467 if rates hit the 10.5% lifetime cap.

Caps, the worst case and payment shock

ARMs come with caps that limit how fast and how far the rate can move, usually written as three numbers like 2/2/5: the most it can jump at the first adjustment, the most at each later one, and the most it can ever rise above the intro rate over the life of the loan. Those caps define the worst case, and it is the number that matters most for the decision — not because it is likely, but because you have to be able to afford it. The calculator computes the worst-case payment by walking the rate up its caps to the lifetime ceiling, and reports the payment shock: the jump from the comfortable intro payment to the first adjusted one.

A borrower who could not handle the worst-case payment is taking a risk an ARM’s intro saving does not justify. Set the caps to your loan’s terms and read the worst-case row first; if it is unaffordable, the fixed loan’s certainty is worth paying for.

How long you’ll stay decides it

The single biggest factor is your horizon. An ARM’s advantage is concentrated in the intro period, when its rate is below the fixed rate; once it starts adjusting, the saving erodes and can reverse. If you’ll move or refinance before the intro period ends, you capture the saving and never face the adjustment — the ARM is close to a free lunch. Stay longer and the picture depends on where rates go: the calculator reports the crossover, the point at which the fixed loan’s cumulative cost falls below the ARM’s, and tells you whether your planned stay clears it.

Try the flat and rising scenarios to bracket the outcome, and change how long you’ll stay to see how sensitive the verdict is. The honest conclusion is rarely “always buy the ARM” or “always fix” — it is “the ARM wins if you leave within N years or rates stay tame, and the fixed loan wins otherwise,” with the worst case as the line you must be able to afford.