Moneyzine
/Mortgages/Option ARM Calculator

Option ARM Calculator

Moneyzine Editor
Author: 
Moneyzine Editor
4 mins
October 4th, 2023
Advertiser Disclosure

This option ARM calculator provides you with a feel for the alternative payment arrangements this type of mortgage has to offer the home buyer. An option ARM is a mortgage where the borrower has the option of making a minimum payment, an interest-only payment, or a fully amortizing payment.

Calculator Definitions

The variables used in our online calculator are defined in detail below, including how to interpret the results.

Total Home Loan Amount ($)

The total amount of money borrowed for this mortgage, also referred to as the principal of the loan.

Start Rate (%)

This is the introductory interest rate provided to purchasers of Option ARM loans. The start rate is sometimes referred to as the teaser rate.

Index Rate (%)

The index rate is a published financial index such as LIBOR (London Interbank Overnight Rate), 12-MTA (Monthly Treasury Average), CODI (Cost of Deposits Index), COFI (Cost of Funds Index), or COSI (Cost of Savings Index), which is used to periodically adjust the interest rate of the ARM.

Margin Rate (%)

With Option ARMs, the margin is the difference between the mortgage's actual interest rate and the index rate expressed in percentage terms. The lower the margin rate, the better the loan. Margins can vary from a low of around 2% to as high as 7%.

Recast Cap (%)

Since Option ARMs allow the borrower to make a minimum payment, which is less than the fully amortized rate, the borrower can find themselves in a negative amortization, or NegAm, situation. The recasting cap will limit how much negative amortization occurs. For example, if the original loan is for $100,000, and the recast cap is 10%, then when the loan has grown to $100,000 x 110% or $110,000, the loan will be recast into a fully amortizing mortgage.

Term of the Loan (Years)

The term of the loan is the number of years over which the mortgage will be repaid. The most common mortgage terms are 15, 20, 25, and 30 years.

Fixed Rate Mortgage (%)

This Option ARM calculator allows you to compare a fixed rate mortgage to the Option ARM you're evaluating. In this example, you'd enter the interest rate on a competing fixed rate mortgage.

Minimum Payment ($ / Month)

The minimum payment for this type of loan is based on an amortization schedule, which uses the start rate (%) to figure out the monthly payments. Keep in mind that while the start rate minimized the borrower's monthly payment, negative amortization occurs. The loan is getting larger each month.

Interest Only Payment ($ / Month)

With an interest-only mortgage payment, you are only paying interest charges each month. The principal, or balance, of the loan is never reduced. This keeps your monthly payments low, but increases the total interest charges over the life of the mortgage.

Deferred Payment ($ / Month)

The deferred payment each month is also referred to as the deferred interest. This value is calculated as the difference between the minimum payment and the interest only payment. This value is equal to the NegAm that occurs each month the minimum payment is made on the loan.

Fully Indexed Rate (%)

The fully indexed rate is equal to the sum of the index rate plus the margin rate. This is the interest rate that is used to determine a fully amortized loan.

Recast Mortgage Amount ($)

The recast mortgage amount is equal to the Total Home Loan amount times the Recast Cap. For example, if the original loan is for $100,000, and the recast cap is 10%, then the recast mortgage amount would equal $100,000 x 110% or $110,000.

Recast Period (Months)

The recast period is an estimate of the number of months that the minimum mortgage payment can be made before the recast mortgage cap is reached.

Recast Monthly Payment ($ / Month)

The recast monthly payment is a fully amortizing loan that uses the recast mortgage amount, the term of the loan, and the fully indexed rate as the determining factors for the loan payments.

Fixed Rate Mortgage ($ / Month)

The fixed rate mortgage value is provided as a comparison tool. By comparing this value to the minimum payment, interest-only payment, and recast monthly payment, the borrower can understand the long-term implications of taking out an Option ARM.


Option ARM Calculator


Disclaimer: These online calculators are made available and meant to be used as a screening tool for the investor. The accuracy of these calculations is not guaranteed nor is its applicability to your individual circumstances. You should always obtain personal advice from qualified professionals.

Related Content

How to Make a Million Dollars in 10 Years
Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
March 26th, 2024
How to Apply Maslow’s Hierarchy to Your Money This Year
You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
March 27th, 2024
How to Tackle Multiple Savings Goals
When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
March 22nd, 2024
The Countdown to Early Retirement: 10 Expenses to Eliminate
Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
March 22nd, 2024
What’s Your One Page Financial Plan? Mapping out Your Future
“What’s your one page financial plan?” — This is the absolute best question that I’ve heard asked in a long time. Instead of talking about your hot stock pick or your fancy investment that shields you from paying taxes, I think it’s time for all of us to step back and ask ourselves the most intelligent question of all, “Why the heck do I care about money anyway??”
March 14th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.