Question 1

What is a 5/1 ARM?

Accepted Answer

The first number is the years the rate stays fixed; the second is how often it adjusts after that, in years. A 5/1 ARM fixes for 5 years, then can adjust every year. This calculator handles 5/1, 7/1, 10/1 and other variants the same way.

Question 2

How do I model what I expect rates to do?

Accepted Answer

Set an expected adjustment per reset — a positive number if you expect rates to rise, negative if you expect them to fall — and every future reset fills in from it. You can still override any individual reset to model a one-time spike or drop.

Question 3

How does an ARM recast at adjustment?

Accepted Answer

When the rate changes, the lender re-amortizes the remaining balance over the remaining term at the new rate, so the loan still pays off on schedule. This calculator recasts against your actual balance — including any extra principal you've already paid — which is the correct, borrower-favorable behavior.

Question 4

Should I take an ARM or a fixed-rate mortgage?

Accepted Answer

Common reasons to choose an ARM: you plan to sell or refinance before the first reset, you can pay down principal aggressively before then, or you expect rates to fall. The fixed-rate comparison above shows what you'd give up or gain against a specific fixed rate.

Question 5

Do extra principal payments help more on an ARM than a fixed loan?

Accepted Answer

Often yes, because future interest on an ARM is charged at a rate you don't control. Paying down the balance before a reset can shrink or entirely avoid the cost of that reset.

Question 6

Can I model the caps on a real ARM disclosure?

Accepted Answer

Yes — turn on caps and a floor to add an initial cap, a per-adjustment cap, a lifetime cap (measured above your starting rate), and a floor rate below which the loan won't adjust.

Question 7

What's the difference between an ARM and a seller-financed loan with an escalating rate?

Accepted Answer

An ARM's rate tracks a market index within a cap structure; an escalating-rate seller note steps up on a fixed schedule the seller wrote into the deal, often as pressure to refinance out before it gets expensive. They use similar math but come from different worlds.

ARM Calculator with Extra Payments