Adjustable-Rate Mortgage (ARM) Calculator: Worst Case
With an adjustable-rate mortgage the payment can rise after the fixed period. Enter the initial rate and your three caps to see the worst-case payment at each of the first five yearly adjustments.
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Formula
- Initial payment =
P x r / (1 - (1 + r)^-n), withr= annual rate / 12. - Rate at adjustment 1 = initial rate + first cap; at later adjustments the previous rate + periodic cap. The rate never exceeds initial rate + lifetime cap.
- Each adjustment recomputes the payment on the balance then owed over the months left.
Worked example
300,000 at 5% for 30 years, fixed 5 years, caps 2 / 2 / 5. Initial payment 1,610.46. Adjustment 1: 7%, payment 1,947.08. Adjustment 2: 9%, 2,302.19. Adjustment 3: 10% (the lifetime ceiling), 2,484.14, which stays the same at adjustments 4 and 5.
When to use it
Use this page to test whether you could still afford the loan if the rate rose as far as the caps allow. For a fixed rate with an interest-only period, use the interest-only mortgage calculator. If you plan to refinance before the first reset, the refinance break-even calculator shows whether the costs are worth it.
Second example
A 400,000 loan at 4.5% for 30 years, fixed 7 years, caps 5 / 2 / 5. The initial payment is 2,026.74. At the first adjustment the rate can rise 5 points to 9.5%, giving 3,108.49, which is also the ceiling.
Common mistakes
- Looking only at the starting payment.
- Confusing the periodic cap with the lifetime cap.
- Forgetting that the lender's margin and index decide the real rate; this page shows only the worst case.
Assumptions
- Worst case: the rate rises by the maximum allowed at every yearly adjustment.
- Adjustments happen yearly after the fixed period; no index or margin is modelled.
- Payments are rounded to cents; taxes and insurance are excluded.
Frequently asked questions
What do the three ARM caps mean?
The first-adjustment cap limits the rise at the first reset, the periodic cap limits each later yearly reset, and the lifetime cap limits the total rise above the initial rate. A 5% initial rate with caps of 2/2/5 can reach 7%, then 9%, then stop at 10%.
How much can my payment rise?
On 300,000 over 30 years at 5% fixed for 5 years, the payment is 1,610.46. In the worst case it becomes 1,947.08, then 2,302.19, then 2,484.14 at the 10% ceiling, about 874 a month more.
Why does the calculator show worst case only?
Actual rates depend on a market index and your lender's margin, which nobody can predict. The worst case is the payment you must be able to afford, so it is the safest number to plan around.
Why are some steps zero?
If an adjustment would fall after the loan is fully repaid, there is no payment, so the step shows 0. Adjustments are assumed to happen once a year after the fixed period, with the balance re-amortized over the months left.
What does a 5/1 ARM with 2/2/5 caps mean?
The rate is fixed for 5 years and then adjusts every year. The first reset can rise at most 2 points, each later reset 2 points, and the rate can never exceed the starting rate by more than 5 points. A 5% start can therefore reach 7%, 9% and then 10%.
ARM vs fixed rate: how much do I save at first?
If a 5% ARM and a 6.5% fixed loan are offered on 300,000 over 30 years, the payments are 1,610.46 and 1,896.20, so the ARM saves 285.74 a month, or 17,144 over 5 years. After that, the default 2/2/5 caps allow a worst-case payment of 2,484.14 at 10%, well above the fixed payment.
What if the caps are only 1/1/3?
With caps of 1, 1 and 3 on the same 5% loan, the worst-case payments are 1,774.96 at 6%, 1,942.13 at 7% and 2,111.18 at 8%, and 8% is the ceiling. Tighter caps limit how fast and how far the payment can rise.