Adjustable-rate mortgages (also called “ARMs” or “variable mortgages”) tend to be most popular when interest rates are high. However, in today’s environment of low mortgage rates, ARMs are more often used by homebuyers who expect to move after a few years. This is because adjustable-rate mortgages generally have lower initial interest rates than comparable fixed mortgages. [See related article “ARMs vs. Fixed Mortgages”]
While an ARM may come with a low introductory rate, it will adjust periodically thereafter, based on current market rates. Homebuyers must be especially careful when choosing a variable mortgage, since they carry the risk of rising interest rates (and a higher interest rate means higher monthly mortgage payments).
There are many different kinds of mortgage calculators for homebuyers, borrowers, and homeowners alike. If you do your research, you should be able to find the right mortgage calculator that addresses your financial situation. In this case, using a mortgage calculator (like the one below) can help you determine the cost of an adjustable-rate mortgage and whether this type of loan is right for you. [See related article “What Type of Mortgage Loan Is Best for You?”]
MORTGAGE CALCULATOR: How Much Will My Adjustable Rate Mortgage Payments Be?
This mortgage calculator computes your estimated monthly payments (of principal and interest) for an adjustable-rate mortgage loan. There are 9 sections to the mortgage calculator:
1. Home price ― The price of the home you are purchasing
2. Down payment ― The amount of your down payment (as a percentage of the home’s price or a dollar amount)
3. Loan term ― The length of the loan (in months or years)
4. Beginning interest rate ― Your initial mortgage rate (for the first interval)
5. Rate cap (life rate cap) ― The maximum interest rate you can be charged
6. Maximum amount the rate will increase at the first interval ― The most your rate can go up at the end of the initial introductory period
7. Maximum amount the rate will increase at each subsequent level ― The most your rate can go up each time the loan “adjusts”
8. Number of months before the first rate increase ― The length of the initial introductory period
9. Number of months between subsequent rate increases ― The length of each adjustment period
As an additional option, you may check the box next to “Show payment schedule” and the mortgage calculator will generate a chart of every monthly payment amount you will owe throughout the life of your loan.
FOR EXAMPLE: Let’s consider the following assumptions for the adjustable-rate mortgage calculator:
Home price ― $275,000
Down payment ― 20% (or $55,000)
Loan term ― 30 years (or 360 months)
Beginning interest rate ― 3.75%
Rate cap ― 7.50%
Maximum amount the rate will increase (first interval) ― 1.25%
Maximum amount the rate will increase (subsequent intervals) ― 0.25%
Number of months before first rate increase ― 6
Number of months between subsequent rate increases ― 12
Based on the assumptions above, the mortgage calculator yields the following results:
Home price ― $275,000
Down payment ― 20%
Beginning payment ― $1,018.85
Beginning interest rate ― 3.75%
Interest compounding ― Monthly
Total amount financed ― $220,000
Total payments ― $511,176.39
Total finance charge ― $291,176.39
It’s important to remember that this mortgage calculator does not include other costs that will add to your monthly housing expenses (such as mortgage insurance and property taxes). The mortgage lender may require you to pay for these items through an escrow account.