Buying a home is one of the biggest financial decisions most people will ever make. With home prices continuing to rise across much of the country, many first-time homebuyers are looking for ways to lower their monthly mortgage payments so they can afford their dream home. One way to do that is with a 5/1 adjustable rate mortgage, or ARM. A 5/1 ARM starts with a fixed interest rate for the first 5 years. After that, the rate can change every year based on market conditions. This allows you to lock in a low rate initially and take advantage of lower rates later if they fall.
But how do you know if a 5/1 ARM is really the best choice for you? That’s where a 5/1 ARM calculator comes in This handy online tool allows you to estimate your future mortgage payments under different interest rate scenarios I’ll walk through the key steps for using a 5/1 ARM calculator so you can make an informed decision about whether this type of loan is right for your home purchase.
Enter Your Loan Details
The first section of the calculator asks for basic information about the mortgage amount, loan term, and initial interest rate. This includes:
- Home price – This establishes the loan amount after your down payment.
- Down payment amount – The more you put down, the less you’ll borrow.
- Initial interest rate – Rates are still near historic lows, but check for current rates.
- Loan term – Most mortgages are for 30 years.
You’ll also need to input the initial rate period. For a 5/1 ARM, this is 5 years. After this, rates can adjust annually.
Factor in Possible Rate Changes
The key section for a 5/1 ARM calculator is where you estimate potential rate changes. This includes:
- Rate after first adjustment – What could rates be in 5 years? Add 1-2 percentage points to be conservative.
- Subsequent adjustment periods – Annual after the first adjustment.
- Expected rate changes – Add 0.5-2 percentage points annually after the first adjustment to project increases.
- Lifetime rate cap – Usually 5 percentage points above start rate.
You want to think through different scenarios of how rapidly rates could rise The calculator will show payment impacts
Add Other Ownership Costs
Your monthly housing payment includes more than just principal and interest. Be sure to factor in:
- Property taxes – Usually 1-2% of home value annually.
- Homeowners insurance – Typically 0.3-1% of home value per year.
- HOA fees – For condos or housing developments, usually $100-300 monthly.
The calculator will show your total monthly payments including these expenses.
Review Payment Impacts
With the above details entered a 5/1 ARM calculator will estimate your
- Initial monthly payment – What you pay the first 5 years with fixed rate.
- Maximum monthly payment – What it could rise to in future years based on rate cap.
- Payment schedule – Review potential increases per your rate change estimates.
It also calculates total interest costs over the loan term. You can see how higher future rates impact this.
The payment schedule helps you understand the potential spikes and budget for them. Make sure the maximum is still affordable based on your expected income growth.
Compare to Fixed Rate Loan
Next, run the same home price, taxes and insurance numbers through a fixed rate mortgage calculator. Input the current 30-year fixed rate.
Compare the initial and maximum payments between the 5/1 ARM and fixed loan. How much interest will you save initially with the ARM vs. long-term with a fixed rate?
If you plan to move before the 5 years are up, an ARM saves substantially. But over the full term, a fixed rate often costs less in total interest depending on rate trends.
Consider Your Timeline
Think about how long you plan to stay in the home. Here are some guidelines on when a 5/1 ARM might make sense:
- Staying 1-5 years – ARM likely saves money.
- Staying 5-10 years – Breakeven point for savings.
- Staying 10+ years – Fixed rate likely better over time.
Of course you can always refinance later if rates fall or your plans change. But consider a fixed rate if you want payment stability.
Check Your Comfort Level
Beyond the numbers, how comfortable are you with the possibility of rising mortgage payments in 5-10 years?
If this uncertainty will cause you to lose sleep, you may want the peace of mind of fixed payments for 30 years. Even if it costs more upfront.
On the flip side, if you like to optimize savings and can adapt to higher payments down the road, a 5/1 ARM may be a smart move.
Use the 5/1 ARM loan calculator to quantify the tradeoffs and weigh the pros and cons before deciding. Being informed on how adjustable loans work helps ensure you make the best home financing decision for your situation.
Frequently Asked Questions
What is a 5/1 ARM loan?
A 5/1 adjustable rate mortgage has an initial fixed interest rate for 5 years. After that, the rate can change every year based on market conditions. The interest rate has a lifetime maximum cap, usually around 5 percentage points above the starting rate.
When might a 5/1 ARM make sense?
This type of loan can make sense if you plan to move within 5-7 years and want to lower initial payments. It can also work if you expect interest rates to fall in the future. The adjustable rates allow you to take advantage of decreases.
What are the risks of a 5/1 ARM loan?
The main risk is that interest rates rise substantially after the 5 year fixed period, increasing your monthly payments. You have to be comfortable with this possibility of uncertainty. Total interest costs over the full loan term are usually higher than with a fixed rate.
Should I get a fixed or adjustable rate mortgage?
It depends on your timeline, comfort with risk, and outlook on rates. Running the numbers through fixed and 5/1 ARM calculators can help determine the best option. Those staying put for 10+ years often prefer fixed rate stability.
How high can my interest rate go with a 5/1 ARM?
Most 5/1 ARMs have a lifetime maximum cap about 5 percentage points above the initial fixed rate. Others may only raise 2 percentage points per year after the first adjustment. Check your loan terms.
See how much you might be able to borrow.
An adjustable-rate mortgage (ARM) is a home loan that starts out with a fixed interest rate, but after a period of time that rate becomes variable. They are also called variable-rate mortgages or floating mortgages.
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This mortgage payment calculator provides customized information based on the information you provide. But, it assumes a few things about you. For example, that you’re buying a single-family home as your primary residence. This calculator also makes assumptions about closing costs, lender’s fees and other costs, which can be significant.