Intergtm

ARM vs. Fixed-Rate Mortgage Comparison

Enter your loan details and planning horizon to see whether an ARM or a fixed-rate mortgage saves you more interest over the time you expect to hold the loan.

Inputs

$

The total mortgage principal at closing (home price minus down payment).

%

The annual interest rate on the 30-year fixed mortgage you are comparing against.

%

The annual interest rate during the ARM's initial fixed period (e.g. the '6' in a 5/1 ARM at 6%).

Years before first adjustment (e.g. 5 for 5/1 ARM).

%

The rate the ARM adjusts to after the fixed period ends. Use your expected or worst-case scenario; actual rate depends on the index and margin at adjustment time.

How long you plan to keep this loan before selling or refinancing.

Total loan amortization term in years (typically 30).

Results update as you type, and the address bar keeps your numbers so the link you share reopens this exact calculation.

ARM interest advantage at horizon

$9,488

ARM saves $9,488 in interest over your 7-year horizon.

Detailed results
ARM initial monthly paymentMonthly P&I during the ARM's initial fixed period.$2,398
Fixed monthly paymentMonthly P&I for the 30-year fixed mortgage.$2,661
Initial monthly savings (ARM vs. fixed)Monthly savings with ARM during the initial period.$263
ARM cumulative interest to horizonTotal interest paid on the ARM through your planning horizon.$178,643
Fixed cumulative interest to horizonTotal interest paid on the fixed loan through your planning horizon.$188,131
ARM balance at horizonRemaining ARM principal balance at the end of your planning horizon.$362,819
Fixed balance at horizonRemaining fixed-rate principal balance at the end of your planning horizon.$364,590

What this result means

ARM interest advantage at horizon: $9,488.

Over your 7-year horizon, the ARM saves you $9,488 in cumulative interest. During the initial 5-year fixed period, the ARM payment is $2,398/mo vs. $2,661/mo for the fixed loan — a savings of $263/mo. If you sell or refinance before the 5-year adjustment, you capture those savings without exposure to the adjusted rate.

Year-by-year ARM vs. fixed comparison

Annual snapshot of monthly payments, outstanding balances, and cumulative interest for both the ARM and the 30-year fixed loan, from year 1 through your planning horizon.

Year-by-year ARM vs. fixed comparison. 7 rows, first 7 shown.
YearARM paymentFixed paymentARM balanceFixed balanceARM cumul. interestFixed cumul. interest
1$2,398$2,661$395,088$395,937$23,866$27,871
2$2,398$2,661$389,873$391,580$47,430$55,449
3$2,398$2,661$384,336$386,908$70,672$82,711
4$2,398$2,661$378,458$381,898$93,572$109,636
5$2,398$2,661$372,217$376,526$116,110$136,199
6$2,997$2,661$367,717$370,766$147,575$162,373
7$2,997$2,661$362,819$364,590$178,643$188,131

How this is calculated

Fixed payment:  M_fixed = P · r_f(1+r_f)^N / ((1+r_f)^N − 1)
ARM initial:    M_arm0  = P · r_a0(1+r_a0)^N / ((1+r_a0)^N − 1)
ARM balance at adjustment (month k):  B_k = P(1+r_a0)^k − M_arm0·((1+r_a0)^k − 1)/r_a0
ARM adjusted:   M_arm1  = B_k · r_a1(1+r_a1)^(N−k) / ((1+r_a1)^(N−k) − 1)
Cumulative interest to month H:
  Fixed: I_fixed = M_fixed·H − (P − B_fixed_H)
  ARM:   I_arm   = sum of monthly interest charges month 1..H
Advantage = I_fixed − I_arm  (positive → ARM wins)

How ARMs and fixed-rate mortgages compare

A 30-year fixed mortgage gives you the same principal-and-interest payment for the entire loan term. Predictability is the primary benefit: no matter what happens to interest rates, your required payment never changes. The trade-off is that lenders price this certainty into the rate — fixed rates are typically higher than the initial rate on an ARM.

An adjustable-rate mortgage (ARM) works differently. For an initial fixed period — commonly 3, 5, 7, or 10 years — the rate is locked, often at a discount to prevailing fixed rates. After that period ends, the rate adjusts periodically (usually once per year for a "1" ARM) based on a benchmark index such as SOFR plus a fixed margin set at origination. A 5/1 ARM, for example, has a 5-year initial rate followed by annual adjustments for the remaining 25 years.

When an ARM wins

The ARM advantage is straightforward when you expect to sell or refinance before the initial fixed period expires. If you close a 5/1 ARM at 6% instead of a 30-year fixed at 7%, every month during those 5 years your payment is lower and more of it goes to principal. At the 5-year mark you sell, take your equity, and never experience a single adjustment. The cumulative interest savings can be substantial — on a $400,000 loan the difference runs into the tens of thousands of dollars.

ARMs can also make sense if you believe rates will fall before the first adjustment. If the index drops and your ARM rate adjusts down, you benefit without the cost of a refinance.

Rate risk after adjustment

The danger arrives if you stay in the loan past the initial fixed period and rates have risen. After the adjustment your payment is recalculated based on the new rate applied to the remaining balance over the remaining term — a process called re-amortization. Even a modest rate increase translates to a meaningfully higher payment, and the fixed-loan holder who locked in their rate years ago may be paying far less. This calculator models a single rate adjustment to your specified post-adjustment rate (your worst case), which makes the trade-off concrete.

Most ARMs also carry caps: a per-adjustment cap (how much the rate can move in a single adjustment), a lifetime cap (the maximum rate over the life of the loan), and an initial-adjustment cap (often larger, covering the jump from the initial rate). This calculator does not model per-period caps — it applies the adjusted rate in full — so it represents a conservative scenario for the borrower.

How to use this calculator

Enter the loan amount, both rates, the ARM fixed period, and the rate you would expect after adjustment (use a realistic worst case, not the teaser rate). Then set your planning horizon to the number of years you genuinely expect to hold the loan. The primary output — the cumulative interest advantage — tells you in one number whether the ARM saves or costs money over that horizon. The year-by-year schedule and the cumulative interest chart let you see exactly when (if ever) the crossover occurs.

Assumptions

  • The ARM has exactly one rate adjustment: from the initial rate to the specified adjusted rate at the end of the initial fixed period. No further annual adjustments are modeled.
  • Per-adjustment caps and lifetime caps are not applied; the adjusted rate takes effect in full on the first month after the fixed period ends.
  • No index tracking: the adjusted rate is the rate you enter, not a calculated index + margin.
  • Both loans are fully amortizing over a 30-year (or specified) term with no balloon payment.
  • No extra or irregular payments are made beyond the scheduled monthly amount.
  • The loan term begins at the same time for both products; closing costs are excluded.
  • Payments cover principal and interest only; taxes, insurance, and PMI are not included.
  • The first payment is due one month after closing (standard US mortgage convention).
  • Monthly compounding at r = annual_rate / 12 is used for all calculations.

Frequently asked questions

›When does an ARM make more financial sense than a fixed-rate mortgage?

An ARM typically wins when your planning horizon is shorter than or equal to the ARM's initial fixed period. If you plan to sell or refinance within 5 years and choose a 5/1 ARM, you enjoy the lower initial rate without ever facing an adjustment. ARMs can also be advantageous if you expect rates to fall before the first adjustment, since a lower index means a lower adjusted rate — though that involves forecasting the market.

›What is a rate cap, and why doesn't this calculator model it?

Rate caps limit how much the ARM interest rate can move. A typical structure might be 2/1/5: the rate cannot rise more than 2% at the first adjustment, more than 1% at each subsequent adjustment, or more than 5% above the initial rate over the life of the loan. This calculator applies your specified adjusted rate in full without capping, which makes it a conservative (worst-case) estimate for the borrower. In practice, caps may prevent rates from reaching the levels you entered.

›What is interest rate risk on an ARM?

Interest rate risk is the possibility that the benchmark index rises significantly before or after adjustment, increasing your monthly payment beyond what you can comfortably afford. Unlike a fixed mortgage, an ARM transfers some of this market risk to you. The risk is manageable if your income is likely to grow, if you have financial cushion, or if you plan to sell or refinance before rates adjust. It becomes dangerous if rates spike and you are unable to refinance (due to declining home values or tightened credit) and cannot absorb the higher payment.

›What is a hybrid ARM?

A hybrid ARM combines a fixed introductory period with subsequent annual adjustments — which is what this calculator models. The '5/1 ARM' name encodes this structure: 5 years fixed, then adjustments every 1 year. Common hybrids are 3/1, 5/1, 7/1, and 10/1. Older 'pure' ARMs that adjusted from day one are rarely offered today; the hybrid structure is now the standard product.

›Should I pick the longest ARM fixed period to minimize risk?

Not necessarily. A 10/1 ARM has a longer initial fixed window, but its initial rate is usually closer to the 30-year fixed rate than a 5/1 ARM would be. The shorter the initial period, the steeper the initial discount — because lenders are exposed to rate movements for less time. If you are confident you will sell or refinance within 5 years, a 5/1 ARM likely offers a bigger discount than a 10/1 ARM, maximizing your savings.

›How does the ARM payment change at adjustment?

At adjustment, the lender takes your remaining principal balance and re-amortizes it at the new rate over the remaining loan term. For example, if you have 25 years left on a 30-year loan and the rate jumps from 6% to 8.5% on a $370,000 balance, your new payment is calculated as if you were taking out a fresh 25-year loan at 8.5% on $370,000. This re-amortization means the payment increase can be substantial even with a moderate rate increase.

›Does the balance at the end of my horizon matter?

Yes, if you plan to sell. The remaining balance is what you owe the lender at closing. A lower balance means you net more equity from the sale. ARMs and fixed loans build equity at slightly different rates because their payment structures differ — during the initial period the ARM payment is lower, so slightly less principal is retired each month (more goes to interest per dollar paid only if rates differ; the amortization math means both retire principal each month, but the payment amounts differ). This calculator shows both balances so you can factor equity into the comparison.

›What if I refinance during the ARM's fixed period?

Refinancing resets the clock — you would take out a new loan, pay closing costs (typically 2–5% of the loan amount), and begin a new amortization schedule. If refinancing into a fixed rate before the ARM adjusts, you lock in certainty but incur costs. This calculator models holding the ARM to your stated planning horizon without refinancing; if you plan to refinance into a fixed loan before the ARM adjusts, the comparison simplifies to the ARM initial period savings minus refinance costs.

Related calculators and guides

Last reviewed and sources

Last reviewed .