How to Calculate 5-Year ARM Mortgages
- 1). Find your "Note," which is the document that explains your 5/1 ARM loan. On a $100,000 loan at 5 percent for the first five years, the principal and interest, or P&I, payment is $536.82. You must add back the monthly taxes and insurance to determine your full payment. If they are $100 per month for taxes and $75 per month for insurance, then the grand total monthly payment is $536.82+$100+$75=$711.82.
- 2). Study your note for an explanation of how the adjustments will work, since the loan will adjust each year after the fifth year. These loans are tied to an index. The 1-year Treasury Bill is a common index and can be found every business day in "The Wall Street Journal." You would get the average of the year's changes of the 1-Year Treasury Bill. The bank will add a margin to the 1-year Treasury average to determine your new interest rate each year. Some are set at 2 percent.
- 3). Calculate the change by adding the index to the margin. Say the year's average is 4.5 percent; you would add the 2 percent margin to get a 6.5 percent rate for the new year. The interest rate on the loan in your example was 5 percent for the first five years, so the loan will adjust upward to 6.5 percent for the next 12 months. There are caps that come into play with these adjustments. Typically, you will see caps shown as 6/2/6, which means that the first adjustment could be very high -- up to 6 percent in the first year of adjustment -- if the index has increased substantially. The adjustments after the first adjustment will be capped at 2 percent (and can adjust downward, depending on the index), and the loan would have a 6 percent cap over the entire life of the loan. Consequently, if it started at 5 percent, the highest it could ever adjust upward to is 11 percent.
- 4). Calculate the new payment of the balance at 6.5 percent for the remaining 25 years -- you can find a link to an online calculator to help with this in the Resources section. After five years of payments at 5 percent interest, the new principal balance would be 91,828.73, so this new balance, figured with a 6.5 percent rate for 25 remaining years, would result in a $620.03 monthly P&I payment. In other words, your monthly payment in year six increases by $83.21. Have your closer or lender provide you with an amortization schedule to see where you are with each payment.