About this calculator
An adjustable-rate mortgage (ARM) charges a fixed rate for an initial period, then adjusts periodically based on a market index plus a margin. A "7/1 ARM" is fixed for 7 years, then adjusts annually. This calculator shows the initial payment, the expected payment after the first adjustment, and the worst-case scenario at the lifetime cap.
The three caps you need to read
- Initial adjustment cap — the maximum the rate can jump at the first reset. A 2/1/5 cap means up to 2 points at first adjustment.
- Periodic cap — the maximum it can move at subsequent annual adjustments. Usually 1–2 points.
- Lifetime cap — the absolute ceiling above the initial rate, typically 5 points. This sets your worst-case payment.
When an ARM makes sense
ARMs work for borrowers who are confident they'll sell, refinance, or pay off the loan before the adjustment period ends. Examples: a 7-year ARM for someone planning to relocate in 5 years, or for a buyer who expects to refinance into a fixed rate when rates fall. The initial rate is typically 0.5–1% lower than the comparable 30-year fixed, which can save tens of thousands during the fixed period.
When an ARM is a trap
If you can't comfortably afford the worst-case payment at the lifetime cap, you're betting on a future you don't control. ARMs caused real damage in the 2008 housing crisis precisely because borrowers underwrote the initial "teaser" rate instead of the worst case. Stress-test before signing.