Arm Break Even Calculator

An ARM (Adjustable-Rate Mortgage) loan has an interest rate that changes periodically, typically after the first 5, 7, or 10 years. This calculator helps determine when the ARM loan's interest rate will equal a fixed-rate mortgage's interest rate, allowing you to compare costs and make informed decisions.

What is an ARM Loan?

An ARM loan is a type of mortgage where the interest rate adjusts periodically based on market conditions. These loans typically have lower initial rates compared to fixed-rate mortgages, but the rate can increase over time. The most common ARM types are:

5/1 ARM: 5 years of fixed rate, then adjusts annually
7/1 ARM: 7 years of fixed rate, then adjusts annually
10/1 ARM: 10 years of fixed rate, then adjusts annually

The break even point is when the ARM's adjustable rate equals the fixed-rate mortgage's interest rate. Before this point, the ARM is typically cheaper, but after this point, the fixed-rate mortgage becomes more attractive.

How to Calculate ARM Break Even

The break even point can be calculated using the following formula:

Break Even Years = (Fixed Rate - Initial ARM Rate) / Rate Increase

Where:

Fixed Rate: The interest rate of the fixed-rate mortgage
Initial ARM Rate: The starting interest rate of the ARM loan
Rate Increase: The annual percentage increase in the ARM's interest rate

For example, if the fixed rate is 4.5%, the initial ARM rate is 3.5%, and the rate increases by 0.5% each year, the break even would occur after:

(4.5% - 3.5%) / 0.5% = 2 years

This means after 2 years, the ARM's rate will equal the fixed rate.

Worked Example

Let's calculate the break even point for a 5/1 ARM loan with the following details:

Fixed-rate mortgage: 4.25%
Initial ARM rate: 3.75%
Annual rate increase: 0.25%

Using the formula:

Break Even Years = (4.25% - 3.75%) / 0.25% = 2 years

This means after 2 years, the ARM's rate will equal the fixed rate. Before this point, the ARM is cheaper, but after this point, the fixed-rate mortgage becomes more attractive.

Frequently Asked Questions

What is the difference between an ARM and a fixed-rate mortgage?

A fixed-rate mortgage has a constant interest rate throughout the loan term, while an ARM has a rate that changes periodically based on market conditions. ARMs typically have lower initial rates but may become more expensive over time.

How does the ARM break even calculator work?

The calculator uses the formula (Fixed Rate - Initial ARM Rate) / Rate Increase to determine when the ARM's adjustable rate will equal the fixed-rate mortgage's interest rate. You input the rates and rate increase, and the calculator provides the break even point in years.

Is an ARM loan right for me?

ARMs may be suitable if you plan to sell or refinance before the break even point, or if you expect interest rates to remain low. However, if you plan to stay in your home long-term, a fixed-rate mortgage might be more predictable.