What the calculator compares
- ARM intro payment vs. fixed payment for the same loan
- ARM worst-case payment if the rate hits its lifetime cap
- Expected total cost of each over your holding period, assuming the ARM adjusts to a rate you specify
- A rate-shock cushion — how far above your expected adjusted rate things can go before the ARM ends up costing more than the fixed loan over that period
The core trade
An ARM hands you a lower payment now in exchange for taking on interest-rate risk later. That trade is good if:
- Your time in the home is shorter than the fixed period (a 7/6 ARM when you’ll move in 5 years is nearly free money)
- The spread between the ARM and the fixed rate is wide
- You have the income and reserves to absorb the worst-case payment if plans change
It’s a bad trade if you’d be forced to sell or refinance under pressure when the rate resets — which is exactly when rates are often high.
Don’t count on refinancing to save you
“I’ll just refinance before it adjusts” assumes rates and your finances cooperate. Underwrite the ARM as if you’ll hold it through at least one adjustment. If the worst-case payment would break your budget, take the fixed rate — or buy the rate down with points.