How this instrument works
An adjustable-rate mortgage (ARM) prices in two pieces: a fixed introductory figure that applies for a set number of years, then a variable one that takes over afterward, recalculated from a published index plus the lender's margin. This instrument computes only the first piece — the payment during that initial window — using the same amortization math a fixed-rate loan uses, because for the length of the teaser period the loan behaves exactly like one.
Lenders set the introductory figure below the prevailing fixed rate because the risk of the loan getting more expensive later shifts to the borrower once that window closes. Buyers who expect to sell, refinance, or pay off the balance before the reset — or who are weighing a lower initial payment against a higher fixed-rate offer on the same house — use this figure to size the loan against their income during the years the teaser pricing actually applies.
The formula amortizes the loan as if the teaser figure held for the entire term you enter, which is a modeling convenience, not a forecast — a 5/1 ARM is fixed for five years, not the full 360-month schedule used to size the payment. The number here says nothing about the index, the margin, or the caps that determine the payment after the reset, and it excludes taxes, insurance, and any lender fees rolled into the loan.
- Enter the amount borrowed under Loan amount, $.
- Set the introductory figure under Initial (teaser) rate, %.
- Enter the loan's full schedule length under Full amortization term, months — 360 for a standard 30-year ARM.
- Read Payment during the initial fixed period — this figure holds only until the first reset.
Worked example — a $350,000 ARM at a 5.5% teaser rate
Borrow $350,000 with a 5.5% initial teaser rate and a 360-month (30-year) full amortization term. The monthly figure is r = 5.5 ÷ 1200 = 0.0045833, and running it through the formula with N = 360 returns a payment of $1,987.26 — the exact number this sheet is built to reproduce during every month the introductory rate is in force.
That $1,987.26 is not a permanent number. Once the fixed window defined by the loan's terms — five, seven, or ten years, depending on the product — ends, the lender recalculates the payment from an index plus a margin, subject to the caps written into the loan documents, and this instrument does not attempt to project what that new rate or payment will be; it only prices the window you are actually locked into now.
Questions
What does the 5 in a 5/1 ARM mean?
It is the number of years the introductory rate stays fixed before the loan begins adjusting; the 1 shows how often it resets afterward, usually once a year. A 7/1 or 10/1 ARM extends the fixed window to seven or ten years. The Full amortization term field here is the loan's total length — usually 360 months — not that shorter fixed window.
Why is the initial ARM rate lower than a fixed-rate mortgage?
Because the lender is only committing to that figure for the fixed window, not for the life of the loan — the risk of it climbing later shifts to the borrower. That discount is the entire appeal of an ARM: a lower qualifying payment during the years the teaser rate holds, in exchange for uncertainty about what the payment becomes once it resets.
Does this calculator show my payment after the rate resets?
No. It computes only the payment during the initial fixed period, using the teaser rate you enter as though it applied for the whole amortization term. The payment after reset depends on the index value, the margin, and the periodic and lifetime caps written into the loan — none of which are known in advance, so no formula can price them today.
What are rate caps, and why aren't they in this formula?
Rate caps limit how much the loan's cost can move at the first adjustment, at each adjustment after that, and over the life of the loan — common structures are written as 2/2/5 or 5/2/5. They bound the eventual rate but do not fix it, so including them would still only produce a range, not the single certain figure this sheet reports for the period you are actually locked into now.
Who actually takes out an adjustable-rate mortgage?
Buyers who expect to sell, refinance, or pay off the loan before the fixed period ends, and buyers comparing a lower initial payment against a higher fixed-rate quote on the same purchase, most often reach for an ARM. The trade only pays off if one of those exits happens before the reset; anyone planning to hold the loan for decades carries the full reset risk instead.
Why does the amortization term stay at 360 months even though the rate is only fixed for a few years?
Because the payment during the fixed period is calculated the same way a 30-year fixed-rate mortgage's payment is — by amortizing the full loan balance over its total length, usually 360 months. The shorter fixed window only controls how long that starting figure is guaranteed to hold; it does not change how the initial payment itself is sized.
References
- CFPB — Adjustable-rate mortgages and how your payment can change
- CFPB — What are rate caps on an ARM, and how do they work?
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.