ARM vs. Fixed Rate Calculator
ℹ RefinanceUSA is not a lender. Results are estimates — "projected" assumes the ARM adjusts to your projected rate; "worst case" assumes the ARM hits the per-adjustment cap every year. How we calculate
How Adjustable Rate Mortgages Work
An ARM has two phases: a fixed-rate period (the initial teaser rate) and an adjustment period (when the rate resets annually based on an index). The most common ARMs are the 5/1 ARM (5 years fixed, adjusts every 1 year after) and 7/1 ARM.
Rate Caps: Your Protection Against Runaway Rates
ARM caps limit how much the rate can change. A common cap structure is 2/2/5:
- First cap (2%): The first adjustment after the fixed period cannot exceed the initial rate plus 2%.
- Periodic cap (2%): Each subsequent annual adjustment is also capped at 2%.
- Lifetime cap (5%): The rate can never exceed the initial rate plus 5%, no matter what happens to indices.
A 5/1 ARM at 6.0% with 2/2/5 caps: first adjustment can go to at most 8.0%. Second adjustment: up to 10.0%. Lifetime max: 11.0%. But the actual rate depends on the index (typically SOFR) plus the lender's margin.
ARM vs. Fixed: Payment Comparison
| Loan Type | Initial Rate | Initial Payment ($400K) | Rate After 5 Yrs | Payment After 5 Yrs |
|---|---|---|---|---|
| 5/1 ARM (6.0%) | 6.00% | $2,398/mo | 7.00% (projected) | ~$2,647/mo |
| 5/1 ARM (worst case) | 6.00% | $2,398/mo | 8.00% (cap) | ~$2,897/mo |
| 30-yr Fixed (6.75%) | 6.75% | $2,594/mo | 6.75% | $2,594/mo (no change) |
3 ARM vs. Fixed Scenarios
Scenario 1 — Selling in 5 years: ARM clearly wins
$500K loan, planning to sell before the first ARM adjustment
| Loan amount | $500,000 |
| 5/1 ARM initial rate | 6.25% |
| ARM monthly payment (5 yrs) | $3,080/mo |
| 30-yr fixed rate | 6.875% |
| Fixed monthly payment | $3,287/mo |
| Monthly savings with ARM | $207/mo |
| Total savings over 5 years | $12,420 |
| Rate risk exposure | Zero — sold before first adjustment |
When the sale timeline is shorter than the ARM's fixed period, the ARM is a straightforward win. The lower initial payment saves $207/month with zero rate-adjustment risk. This is exactly the use case ARMs were designed for.
Scenario 2 — Staying 10 years: Fixed wins in the worst case
$400K loan, staying 10 years, 5/1 ARM vs. 30-yr fixed
| 5/1 ARM initial rate | 6.00% |
| Fixed rate alternative | 6.75% |
| ARM savings: years 1–5 | $196/mo × 60 = $11,760 |
| ARM rate after year 5 (projected) | 7.00% → $2,719/mo |
| ARM rate worst case | 8.00% → $2,945/mo |
| Fixed payment (years 6–10) | $2,594/mo (unchanged) |
| Total over 10yr — ARM projected | $309,780 |
| Total over 10yr — ARM worst case | $327,240 |
| Total over 10yr — Fixed | $311,280 |
In the projected scenario (rate adjusts to 7%), the ARM costs slightly less over 10 years. In the worst case (caps out at 8%), the fixed loan saves $15,960 over 10 years. Whether the ARM's initial savings outweigh the adjustment risk depends entirely on what happens to rates after year 5.
Scenario 3 — ARM to fixed refinance: Locking in before adjustment
Existing 7/1 ARM approaching year 7, refinancing to fixed
| Current ARM balance | $355,000 (after 7yr of payments) |
| Current ARM rate | 6.25% (still in fixed period) |
| Projected rate after adjustment | 7.50–8.00% (current index + margin) |
| New 30-yr fixed rate available | 6.625% |
| Monthly increase if ARM adjusts | +$270–$390/mo |
| New fixed payment | $2,274/mo (slightly higher than current ARM) |
| Refinance cost (2%) | $7,100 |
| Break-even on refi | 15–23 months (vs. expected 6%+ adjustment) |
When an ARM is approaching its first adjustment and rates are elevated, refinancing to a fixed rate before the adjustment is often prudent. Even at a slightly higher fixed rate than the current ARM teaser, you're buying certainty against a potentially large adjustment. The refinancing cost break-even here is 15–23 months — well worth it if you plan to stay.
Frequently Asked Questions
What is a 5/1 ARM?
A 5/1 ARM has a fixed rate for the first 5 years, then adjusts annually. The adjustment is based on a reference index (usually SOFR) plus a lender margin. Rate caps protect against extreme movements — typically 2% per adjustment and 5% over the life of the loan.
When does an ARM make sense?
An ARM makes sense when (1) you plan to sell or refinance before the fixed period ends, (2) the initial rate discount vs. a fixed loan is 0.5%+, or (3) you expect interest rates to fall during the adjustment period. For long-term holds with no rate certainty, a fixed loan is generally lower risk.
What are ARM rate caps?
Caps limit annual and lifetime rate increases. A common 2/2/5 structure means: first adjustment is capped at initial rate + 2%, each subsequent adjustment at +2%, and total lifetime change is capped at +5%. A 6.0% ARM with 2/2/5 caps can never exceed 11.0%.
Should I refinance from ARM to fixed?
Yes, when (1) your ARM is approaching its first adjustment and current fixed rates are reasonable, (2) you plan to stay long-term, or (3) the projected adjustment would significantly increase your payment. Use the calculator above to model your specific adjustment scenario against available fixed rates.
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