Sample ARM Mortgage Comparison

Let’s say you are comparing two adjustable rate mortgages on a $200,000 loan. One is an ARM where the interest rate is fixed for 1 year and may change every year after that, and the other loan is an ARM which is fixed for 5 years (often written as 5/1). Let’s say you think you’ll live in your home for the next 5 years. The following table shows payments for both loans:

 

 
1/1 ARM 5.75%
5/1 ARM 6.875%
1st year monthly payment
$1,167
$1,247
2nd year monthly payment
$1,294
$1,247
3rd year monthly payment
$1,424
$1,247
4th year monthly payment
$1,555
$1,247
5th year monthly payment
$1,689
$1,247
Total payments in 5 yrs
$85,548
$74,820
Total principal 
$10,429
$13,098

 

In this example, you pay less with the 5 year arm by about $10,000 in 5 years, and you managed to repay more principal, even though the first year’s payment for the 1 year ARM was less by about $80 dollars each month. It’s really a guessing game, though. Will rates continue to rise at 1% yearly? The 5 year ARM gives you some security, with a steady monthly payment.

Liz Suto is a professional writer, North Phoenix real estate agent and Anthem Arizona resident.