An ARM’s rate is fixed only for an initial period. After that, it adjusts to an index plus a margin, subject to caps that limit how much it can move at once.
How it works
During the fixed period, the payment is a standard amortized figure. At reset, the new rate is the index plus the margin — capped by the loan’s first-adjustment cap — applied to whatever balance is actually left after the fixed period, over the remaining term.
What this does not include
Real ARMs often have several caps (initial, periodic, and lifetime) plus a floor — this calculator models only the first-adjustment cap, not the full cap structure across every future reset.
How to use this calculator
- Enter the loan amount, initial rate, and initial fixed period.
- Enter the expected index rate and margin at reset, and the first-adjustment cap.
Frequently asked questions
What are the index and margin?
The index moves with market conditions; the margin is a fixed number of percentage points the lender adds to it — together they set the new rate once the initial period ends.
Can my rate go up every year after the reset?
Depending on the loan’s terms — many ARMs have periodic adjustment caps limiting how much the rate can move at each subsequent reset, not just the first.
Why would anyone choose an ARM?
A lower initial rate than a comparable fixed-rate loan, which can make sense for a borrower who plans to sell or refinance before the first reset.
