Payment Calculators For Adjustable Rate Mortgages (ARMs)
August 18, 2000, Revised March 18, 2003, February 6, 2011

I have 2 calculators that show how monthly mortgage payments will change under a variety of possible future interest-rate scenarios, as defined by the user. Calculator 7b covers ARMs on which the monthly payment is always "fully amortizing", meaning that the payment would pay off the loan in full if continued over the remaining life at the current interest rate. Calculator 7c covers ARMs on which the payment is not necessarily fully amortizing, and amortization may be negative -- meaning that the payment does not cover the interest, so the difference is added to the balance.

The calculators work on both new and old mortgages. If it is a new mortgage, you enter the loan amount, initial interest rate and term on the first 3 lines. The first rate adjustment occurs at the end of the initial rate period. If it is an old mortgage, you enter the current balance (the amount you still owe), the current interest rate, and the period remaining to term. For example, if it was a 30-year loan but you are 3 years into it, you have 27 years (324 months) remaining. The first rate adjustment is the initial rate period less the number of months that have expired. For example, if it is a 5/1 ARM where the initial rate holds for 5 years and you are 3 years into it, you enter 24 months as the number of months to the first adjustment.

Entries Bearing on Interest Rate Adjustments


Current Value of ARM Interest Rate Index requires you to identify the interest rate index that your particular ARM contract uses, and then find its most recent value. The rate on every ARM is tied to movements in a specific interest rate series that is published periodically. About a dozen different series are used, and the one that applies to your ARM is shown in the ARM disclosure form that was given to you when you took out the loan. If you don't have it, call up the servicing agent to whom you send your payments and ask for the information.

Once you identify the index, you can find its most recent value online at a number of different sites. The most complete is www.mortgage-x.com.

Margin is the amount that is added to the interest rate index to determine your ARM rate. It usually ranges from 2.25 to 3%, though on sub-prime loans it can be 5% or even higher. The margin that applies to your ARM is shown in the ARM disclosure form and on the mortgage note. If you can't find it, call up the servicing agent to whom you send your payments and ask for it.

Number of Months to First Rate Adjustment on a new loan is the period for which the initial rate holds. On an old loan, it is the number of months until the next rate adjustment.

Maximum Interest Rate Change on First Rate Adjustment is the maximum amount by which the interest rate can change on the first rate adjustment date. (Calculator 7c does not have this item because negative amortization ARMs don't have rate adjustment caps.) ARMs on which the initial rate holds for 5 years or longer but which then adjust the rate every year are likely to have a larger cap at the first rate adjustment than on subsequent adjustments. Hence, provision is made in the calculator for two caps, one applicable to the first adjustment and the other applicable to all later adjustments.

Duration in Months Between Subsequent Rate Adjustments is how often the rate is adjusted following the first adjustment.

Maximum Interest Rate Change on Subsequent Rate Adjustments is the maximum amount by which the interest rate can change after the first rate adjustment date. (Calculator 7c does not have this item because negative amortization ARMs don't have rate adjustment caps.)

An example of the last 4 entries is a new "7/1 ARM, 5/2" where the initial rate holds for 7 years after which it adjusts yearly,  the first rate adjustment cannot exceed 5%, and annual rate adjustments thereafter cannot exceed 2%.

Maximum Interest Rate Over Life of Mortgage and Minimum Interest Rate Over Life of Mortgage are in your note and ARM disclosure form.

Entries Bearing on Payment Adjustments


The following entries apply only to Calculator 7c which allows payments to be set independently of the rate. These entries do not appear on 7b because payments on ARMs that amortize fully are always calculated the same way.
Monthly Payment of Principal and Interest
Initial Monthly Payment of Principal and Interest: Lenders will usually calculate the payment at some rate, called the "payment rate", that is below the actual interest rate. You enter the dollar amount, regardless of how it is calculated. 

Payment Adjustment Period: This period may be the same as the interest rate adjustment period, or it may not.

Payment Adjustment Cap: This is the largest payment change permitted, except at the end of a payment recast period, or in the event the loan balance hits the negative amortization cap.

Payment Recast Period: At the end of this period, which is 5 or 10 years, the payment is recalculated to be fully-amortizing.

Negative Amortization Cap: The maximum  possible loan balance, for example, 115% of the original loan. If this cap is breached,  the payment is recalculated to be fully-amortizing.

Interest Rate Scenarios


You can select as many as 6 assumptions about future interest rates. The more scenarios you select, the less detail you will receive in the output schedules. For example, if you select one scenario, the output table will show the ARM rate, the value of the index, the monthly payment, the interest and principal components of the payment, and the balance. If you select 6 scenarios, you will get just the ARM rate for each.

Stable Index should be viewed as your benchmark, because it tells you what would happen if interest rates remain the same through the life of your loan. More precisely, it assumes stability in the specific index used by your ARM, but the interest rate indexes all tend more or less to move together.

Worst Case is also worth looking at because it is exactly what it says. This scenario assumes that rates increase by as much as the contract allows. If you can deal with the payment increases associated with this scenario, you are safe with this ARM.

Neither the no-change nor the worst-case scenarios are likely to materialize, so the calculator allows you to design other scenarios that you or your guru believe might be more likely. You can assume that the index rate trends either up or down by amounts selected by you, or fluctuates over periods and by amounts selected by you.
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