Fixed vs. Adjustable Rate Mortgage (ARM) Calculator
Published on Apr 30, 2015 08:08 pm
It’s one of the great mortgage questions every homebuyer must ponder — do you go for a fixed-rate loan or an adjustable-rate mortgage (ARM)? Your choice can affect not only the total amount of mortgage interest you pay over the life of the loan, but your monthly mortgage payment and your ability to make that payment year after year. Our Rate Comparison Mortgage Calculator can help you understand each option, as well as their respective pros and cons.
Fixed vs. Adjustable Rate Mortgage (ARM) Calculator Definitions
(Initial) annual interest rate — For fixed-rate loans, this rate will remain the same over the entire loan term. For adjustable-rate mortgages, the loan rate will change over the life of the loan. Use the interest rate you’ll pay for the first term of the loan, before the rate adjusts later on.
Current index rate — This is a base interest rate that reflects market conditions, and a variety of third-parties maintain different index rates. Your lender will decide which index to apply to your loan; the London Inter-Bank Offer Rate (LIBOR) is the index most commonly used for mortgages.1
Lenders margin — Set by the lender, your margin plus the index rate make up the amount by which your interest rate will increase when your ARM adjusts.2
Absolute minimum rate — The lowest interest rate you will pay for your ARM, typically occurring at the beginning of the loan period.
Absolute maximum rate — The maximum interest rate to which your ARM can reset.
Marginal tax bracket — The tax bracket you fall into based on your annual gross income and IRS tax rate schedules.