How Much More Will You Pay After Your ARM Adjusts?

If you have an adjustable-rate mortgage (ARM), your monthly payment could increase by hundreds of dollars after the low introductory rate ends.

Monthly payment after rate adjusts $1337, Current Monthly Payment $955

Sample ARM Adjustment

Amount of mortage: $200,000
Current ARM interest rate: 4%
Interest rate after ARM adjusts: 7.5%
Current ARM payment: $955/mo.
Payment after rate adjusts: $1337/mo.
YOU'D PAY $382 MORE EACH MONTH!
Let's say you have a $200,000 mortgage that is a 5/1 ARM with an introductory rate of 4%. Your current monthly payment is $955. When your ARM adjusts, the index will stand at 5% and your margin will be 2.5%, resulting in a new, fully-indexed rate of 7.5%. The monthly payments would increase to $1337. After the adjustment, your mortgage payments would increase by $382 per month!

Don't wait for a rate hike: Learn more about your ARM options now!

Explore Your Refinance Options!

Option Future Plans Risk Keep in Mind
Do Nothing Plan to move in a year or two. Medium: Depending on your current loan, if rates rise, your payments will, too. If you can afford higher payments and plan to move soon, refinancing generally won't pay for itself.
Refinance to a fixed-rate loan Plan to stay in your home 7 years or more. Low: Your payments are locked for the term of the new loan. Your rate may be some-what higher than your current ARM rate, but you can rest assured that your rate won't rise to an unaffordable level.
Refinance to a hybrid ARM Plan to stay in your home 3 to 7 years. Medium: Your rate and payment can be locked for the initial period (usually 3, 5, or 7 years). ARMs generally carry lower rates than fixed-rate loans, so a hybrid ARM can provide peace of mind, along with a lower rate.

Is now the right time to refinance your ARM?

Cash Flow
If you are worried about being able to handle your monthly payments after your ARM adjusts, refinancing may help keep your payments affordable and maintain your cash flow.

Future Plans
If you plan to move within a year or two, the cost of refinancing may not be worthwhile. To benefit, you need to stay in your home long enough for the new loan to pay for itself. See example

Risk Tolerance
Adjustable-rate mortgages offer an advantage when interest rates are falling. If you're worried that rates may rise, or you're uncomfortable not knowing what your mortgage payments will be in the future, you might want to swap your ARM for the stability of a fixed-rate mortgage with consistent monthly payments.

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Get Fast, Clear Answers to your ARM Questions


How much can ARM payments increase?
Where do I find my ARM caps?
What is an adjustment interval?
What is a margin?
What is a hybrid ARM?
How are interest rates on ARMs determined?
How much can ARM payments increase?

Most adjustable-rate mortgages have caps to limit how much the interest rate and your monthly mortgage payments can be raised when your ARM interest rate is adjusted.

The most common ARM caps are the "initial cap", "periodic cap", and "lifetime cap". The initial cap limits how much the interest rate can be increased the first time it is adjusted. The periodic cap limits how much the interest rate can be increased each subsequent time it is adjusted, after the initial adjustment. The lifetime cap sets a maximum amount by which the interest rate can be increased as long as you keep the loan.

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Where do I find my ARM caps?

The caps on your ARM, along with the adjustment periods, margin and index, should be disclosed in your loan documents. If these documents aren't handy or you can't find the information you need, call the telephone number on your mortgage statement and ask the lender or loan servicing company to assist you.

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What is an adjustment interval?

For an ARM, the adjustment interval is the time between changes in the interest rate and/or monthly payment, usually one, three, or five years. The adjustment periods should be disclosed in your original loan documents.

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What is a margin?

The margin is the amount a lender adds to the index on an adjustable-rate mortgage to establish the adjusted interest rate. The margin on your ARM should be disclosed in your original loan documents.

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What is a hybrid ARM?

A hybrid ARM combines the features of a fixed-rate mortgage with those of an ARM. Like a fixed-rate mortgage, the loan's interest rate is stable for up to ten years. After the initial period, however, it converts to an ARM, and the rate is adjusted every year for the remaining life of the loan.

You'll see hybrids referred to as 3/1 or 5/1, and so on. The first number is the length of the fixed term - usually three, five, seven, or ten years. The second is the adjustment interval that applies when the fixed term is over. So, with a 7/1 hybrid, you pay a fixed rate of interest for seven years; after that, the interest rate will change annually.

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How are interest rates on ARMs determined?

Lenders base their ARM interest rates on an index rate and add a predetermined margin to calculate your final or fully-indexed rate. Changes to the index rate dictate how your mortgage rate will adjust at each adjustment period. Lenders use different types of indexes to set ARM rates and these index rates can differ significantly. Some indexes are relatively stable, while others tend to be far more volatile. Often, ARMs based on more stable indexes carry a higher margin than those based on indexes that are more apt to react quickly to market conditions.

The indexes most often used by lenders are:

  • 12-Month Treasury Average (MTA): This index, also known as the 12-Month Moving Average Treasury index (MAT), is based on a moving average of the monthly yields on U.S. Treasury securities. It is adjusted once a month and moves slowly, lagging behind the other indexes.
  • 11th District Cost of Funds index (COFI): This widely used index is calculated monthly, based on the weighted average of interest rates paid on savings and checking accounts by institutions in the 11th Federal Home Loan Bank District (consisting of banks based in Arizona, California and Nevada). Its rate also tends to change slowly.
  • Constant Maturity Treasury indexes (CMT): These indexes follow the average weekly or monthly yields on U.S. Treasury bills. They are more attuned to events in the economy and can change rapidly. The one-year CMT is widely used for mortgages with annual rate adjustments.
  • London Interbank Offered Rate indexes (LIBOR): These are based on the average interest rates at which London banks borrow funds from each other. They are more volatile than the COFI or MTA indexes. However, LIBOR-based mortgages tend to have low initial rates. They also tend to have lifetime and periodic interest rate caps to protect borrowers from spikes in the index rate.

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